Share of NRIs, overseas investors in mutual fund assets declining

The share of non-resident Indians (NRIs) and overseas investors in Indian mutual funds has been declining over time, despite adding half-a-trillion rupees to holdings over the last five years.

Mutual fund holdings for the segment went up from Rs 0.95 trillion as of December 2018 to Rs 1.54 trillion as of December 2022, shows Business Standard analysis of data from the industry body Association of Mutual Funds in India (Amfi).

Their share in overall mutual fund assets has fallen from 4.2 per cent to 3.9 per cent during the same period.

Easier entry for domestic investors thanks to a wave of financial technology (fintech) ventures increased the domestic share of assets under management (AUM), and correspondingly may have had an impact on the share of overseas investors, suggested Neil Parag Parikh, chairman and chief executive officer at PPFAS Mutual Fund.

“During the Covid-19 years, we saw a large number of new investors coming in.

"The market was attractive and fintechs made it easier to invest,” he said.

High returns in developed markets like the US during the pandemic may have also drawn some flows away, according to the sales head of an asset management company.

“That may be a reason why flows would have moved more to the US market than into India.

"Also, the rupee was depreciating significantly in 2022.

"These factors would have led to shrinking flows from NRI investors,” said the person.

The Nasdaq Composite Index was 17 per cent between December 2019 and December 2022.

Many technology stocks rose by a larger margin.

The MSCI USA index was up 18 per cent during the same period.

The Indian rupee depreciated from Rs 71.4 against the dollar in December 2019 to Rs 82.7 as of December 2022.

A depreciating currency reduces returns for overseas investors.

The number of investor accounts in mutual funds rose from around 80-90 million in 2018 and 2019 before the pandemic, to over 140 million in December 2022.

The overall assets under management were up from Rs 23 trillion to Rs 40 trillion during the same period.

Some headwinds may have affected overseas investor ability to participate during this time.

Non-resident Indian investments are affected by the Foreign Account Tax Compliance Act (FATCA).

This puts onerous compliance requirements on any institution accepting capital from a US citizen or resident.

They are required to inform the US tax department of any potential issues.

The rule applies to both individuals and non-individuals.

“The impact of FATCA is relevant not only at the point of ‘onboarding’ of investors but also throughout the life cycle of the investor account or folio.

"Any event which impacts customer tax status or change of key information may trigger an impact under FATCA.

"Further, FATCA due diligence is to be directed at each investor (including joint investor),” according to an Amfi note on the law.

Some mutual fund houses are said to require investments via offline mode to make it more secure.

Others have chosen to not accept money from US-based investors in the first place to avoid the burden associated with compliance.

Currency is unlikely to be a major reason for longer-term overseas flows, according to Mohit Gang, chief executive officer and co-founder of financial services provider Moneyfront.

“Since the Indian MF is only a part of their portfolio, near-term volatility in currency is not really a problem for them,” he said.