NRE FDs vs Debt Mutual Funds: Which Is Better for NRIs?

For NRIs, NRE Fixed Deposits (FDs) have always remained an easy and safe way to invest in India. With the promise of tax exemption, security, and fixed interest, NRE FDs have remained a popular choice. However, with the change in the global financial landscape, the risk of currency depreciation (INR) and reporting requirements, debt mutual funds have emerged as an alternative for NRIs.

Want to invest in India but are confused between NRE FDs and debt mutual funds? This blog will provide you with a clear and in-depth comparison of both investments and help you choose the one that perfectly matches your financial goals.

What Is an NRE Fixed Deposit?

An NRE FD is a type of bank deposit through which NRIs can park their foreign currency earnings in INR and earn interest on them. The earned interest on these FDs is tax-free in India. Additionally, you can transfer the whole amount (principal and interest) to your foreign resident country without any restrictions.

The minimum tenure is one year, and the maximum is 10 years of NRE FDs. Also, depending on the deposited amount and tenure from bank to bank, the interest rates on the FDs vary. Considering this, NRE FDs can offer a maximum of 8% interest.

In simple words, NRE FDs allow you to open an account with an authorized Indian bank, send money from overseas, the bank converts it into Indian rupees, and for 1 to 20 years, you lock it in as a fixed deposit.

This was all about NRE fixed deposits. Moving ahead, let's know about debt mutual funds.

What Are Debt Mutual Funds?

A debt mutual fund is one of the types of mutual funds that invests in fixed securities such as corporate bonds, government bonds, commercial papers, treasury bills, and more. These funds aim to provide a regular income. Additionally, they have the potential for increasing capital.

Further, the debt returns depend on credit quality, interest rates, and maturity of the underlying securities. Also, debt mutual funds are subject to interest rate risk, market risk, and credit risk. Apart from this, depending on the resident country, debt mutual funds are taxed differently.

This was all about debt mutual funds. Moving further, let's know about the key difference between NRE FDs and debt mutual funds.

NRE FDs vs Debt Mutual Funds: Key Differences

The table below with various parameters summarises the key difference between NRE FD and debt mutual funds:

These were the key differences between NRE FDs and debt mutual funds for NRIs. Moving ahead, let's know about the NRE FDs vs the debt mutual fund, which is the better investment option for NRIs.

Which Option Is Better for NRIs?

Choosing between NRE FD and debt mutual funds depends on investment horizon, risk appetite, and return expectations. Further, to help you out, here are some guidelines that help you choose the right investment option as per your financial goals:

Scenarios Where NRE FD Works Better

• You prefer an assured and fixed income with low risk.
• Have a short-term investment horizon, i.e., 1 to 10 years.
• Without any delays and restrictions, you want to transfer your money back to your foreign resident country.
• You want to avoid paying tax on your income and filing tax returns in India.

Scenarios Where Debt Mutual Funds Work Better

• Looking for a higher return with a low to moderate risk appetite.
• Have a short to medium-term investment horizon of up to 5 years.
• Do not have issues with the credit quality and market fluctuations of the underlying securities.
• As the tax is only charged on redemption, these funds are tax-efficient.

So, according to your financial goals and mentioned scenarios, you can choose among the NRE FDs and debt mutual funds. Now, moving further, important factors NRIs should consider when choosing NRE FDs or debt mutual funds.

Important Factors NRIs Should Consider

The choice between NRE FDs and debt mutual funds completely depends on your financial goals, resident country, and taxation laws. Considering this, here are some important factors NRIs should consider while selecting from both the investments:

• The AMC manages the credit and liquidity risk of debt mutual funds in India.
• For NRIs who focus on lower tax slabs and safety, NRE fixed deposits are a good option.
• For NRIs who focus on liquidity and higher tax slabs, debt mutual funds are the right option.
• Debt funds are volatile but not the same as equity mutual funds. Generally, the deflection ranges between 0.5% to 1%.
• If you are an NRI from a country where you are not liable to pay tax on your foreign interest income. For instance, Singapore, Kuwait, Dubai, Qatar, etc. To get a tax-free return in India, an NRE FD is the best option for investment.
• Further, you live in a country that taxes your foreign income, i.e., Australia, the USA, the UK, and more. If you believe that against your local currency in the future, the INR will depreciate, you should opt for debt mutual funds.

These are some of the factors that NRIs should consider while choosing between NRE FDs and debt mutual funds.

Final Thoughts

Lastly, among NRE FD and debt mutual funds for NRIs, which is better, does not have a proper answer. Both have them have their own benefits, features, and drawbacks. While NRE FDs are good for NRIs living in countries that charge zero tax on foreign income, debt mutual funds are a perfect investment that offers after-tax benefits for those who live in tax-paying countries. Considering this, among both the investment options, choose the one that matches your financial goals, risk appetite, tax situation, and return expectations.

Further, if you need any assistance in choosing the right NRI investment option, connect with Savetaxs. With a deep understanding of tax regulations, global compliance requirements, and investment options, our experts help you choose the right investment options. So contact us today and maximize your returns while staying compliant with the tax laws in both India and overseas.