Common Mutual Fund Investment Mistakes NRIs Should Avoid

For NRIs, mutual funds are popular investment options in India as they offer strong returns of generally 10-15%. However, being an NRI managing your investment in India, probably right now, you are making at least 3-4 mistakes. Additionally, these mistakes also impact your investments, make you non-compliant with FEMA guidelines, and cause you to pay over-taxes.

To help you out, in this blog, we have mentioned some of the common mutual fund investment mistakes that NRIs made. So read on and gather all the information about it. 

Mistakes NRIs Make While Investing in Mutual Funds in India

Being an NRI, navigating the complex world of Indian investment can be daunting, specifically when you have a busy schedule and are away from your homeland. Considering this, let's look at common mutual fund investment mistakes NRIs should avoid. 

Mistakes Made Before Investment

These are the primary mistakes that occur before investments. There are the most common and often the most costly ones that you fix later. 

Using Your Old Resident Bank Account

Once your residential status changes from Indian to NRI, under the FEMA (Foreign Exchange Management Act), you are no longer allowed to continue your Indian savings accounts for investments. Many NRIs ignore this. It further results in the following things:

• Account freezing due to violation of FEMA regulations.
• Questioned by the tax officials about your residential status.
• Transactions blocked by the bank.
• Not allowed to repatriate funds. 

So, to avoid all these impacts once you become an NRI, convert your resident savings account to an NRO account. Additionally, depending on your investment goals, you can also open an NRE account. 

Not Updating KYC to NRI Status

Once your residential status changes to NRI, it is mandatory for you to update your KYC with the KRA (KYC Registration Agency) within a reasonable time. It further results in:

• Your fund redemption gets blocked by AMCs until you update your KYC.
• Not allowed to make additional investments or start new SIPs in India.
• Non-compliant with FEMA rules.
• May be liable to pay tax on higher TDS rates.

So once you gain the NRI status, immediately update your KYC. 

Skipping the FATCA/ CRS Declaration

All NRIs who are investing in India need to follow FATCA (Foreign Account Tax Compliance Act) and CRS (Common Reporting Standards). It is a part of your KYC process. Many NRIs fill these forms incorrectly, or some even skip this, thinking they are not citizen of America, so on them FATCA will not apply. Considering this, it can result in:

• AMC cannot accept your investments without the proper declaration of FATCA/ CRS.
• An incorrect FATCA/ CRS declaration can result in reporting to the wrong tax officials.
• If you are a US person, i.e., tax resident, citizen, or green cardholder, and you do not declare this to AMC, they can freeze your account. 

Further, instead of facing all this, honestly file the FATCA/ CRS declaration. 

Mistakes Occur While Choosing Funds

Once you set up your account, the next mistake you make is choosing the wrong mutual funds to invest in. 

Assuming All AMCs Accept NRIs from Your Country

One thing you should know is that not all Asset Management Companies (AMCs) accept investments from all foreign countries. This situation is generally faced by the Canadian and US-based NRIs due to the compliance requirements of FATCA. Considering this, being an NRI, if you invest in a fund through an AMC that does not accept NRIs from your nation, then you may:

• Your future transactions get blocked.
• After processing for weeks, your application gets rejected.
• Force redemption, if they later found out your residency.

So, it is advisable before investing check the AMC policy. 

Chasing Top Performers of Last Year

Every January, "Top 10 Mutual Funds of the Year" is posted by the financial websites. NRIs, according to these lists, select their investment. It is one of the most common mistakes that NRIs generally make. It further outcomes in:

• Funds that performed well last year now perform their opposite, i.e., underperform.
• After the growth that has already happened, you are buying the funds at a high cost.
• Generally, top performers are focused on hot sectors. For instance, investing in tech in 2020 and pharma in 2021. 

Considering this, instead of chasing top performers, focus on consistency over 3-5 years. 

Ignoring Currency Risk Entirely

NRIs earn in foreign currency, i.e., GBP, USD, AED; however, they invest in mutual funds in India denominated in rupees. Well, for every person, whether he/she is a resident Indian or an NRI, enormously the rupee-to-foreign-currency exchange rate matters. Many NRIs forget about this. When they see their invested fund provide a 15% return, they assume that in their home country, they also earn 15% but it is not so. Further, NRIs should not ignore the currency risk. 

Mistakes Made During Investment

Once you correctly invest in the mutual fund, the next set of mistakes you make is when holding your investments.

Trying to Time the Market

NRIs are scared of market crashes. They live far away from India, and reading headlines of the market downfall creates a stressful situation for them. Considering this, many NRIs during the 2020 COVID crash sold their mutual funds at 30-40% losses. Within six months, the market recovered. Here, those who held the investment in the next year received 15-20% returns. Further, let's know why it is an issue:

• During the market crashes, you sold the investments in losses.
• You did not get the benefit of returns after market recovery.
• Your returns are reduced by taxes and transaction costs.

So, to avoid these types of circumstances, you should follow a disciplined approach.

Not Reviewing SIPs and Portfolio

Many NRIs, when feeling optimistic, set up SIPs. After that, for a year, they forget about them, no rebalancing, reviews, or updates. Now, see how it impacts their investments:

• Your financial situation, such as income, risk tolerance, and goals, changes; however, not your portfolio. 
• Without your realization, sector concentrations develop. For instance, because of the good performance of the tech funds, 50% in IT increases.

Considering this, annually review your mutual fund portfolio so you can also take advantage of market growth and increase your returns. 

Not Nominating Beneficiaries

Indian mutual funds need to have a nominee. For instance, if due to health reasons you passed away without nominating anyone. In this scenario, your legal heirs face a lengthy procedure to claim your funds. Additionally, sometimes it takes years as well. Considering this, from June 1, 2025, SEBI made it mandatory for all investors to have a nominee on all mutual funds and demat accounts. Yet many NRIs do not consider it, and after that, their legal heirs face the following situations:

• Until the legal heirs of the investment does not provide court orders or succession certificates, the mutual funds remain stuck.
• The process generally takes 1-3 years in India.
• Even in emergencies, your family did not get access to the money from investments. 

Further, to avoid these types of situations, add nominees to all your mutual fund investments. 

Mistakes Associated with Tax & Compliance

These mistakes are associated with the tax filing and maintaining compliance with the Indian and foreign tax officials. 

Not Filing ITR in India

If you have a taxable income in India, no matter whether you are a resident or an NRI, you need to file income tax returns. It includes dividend income from mutual funds, capital gains received from the redemptions of mutual funds, and interest from NRO accounts. Further, let's see why this is a problem for NRIs:

• Not paying the ITR results in paying penalties (INR 5,000 to INR 10,000) and 1% interest per month on unpaid tax.
• You cannot claim a TDS refund even if the excess tax amount was deducted.
• To offset it with future gains, you cannot carry forward capital losses.
• Non-compliance with tax laws can create issues when applying for visas, loans, or moving to India. 

So, stay compliant with tax laws and file your ITR on time.

Missing DTAA Benefits

Do you know that India has signed Double Taxation Avoidance Agreements (DTAA) with 90+ countries? This agreement helps you from paying taxes on the same income twice. However, the DTAA benefits do not apply automatically. You need to claim them explicitly. Now, let's know why it is an issue:

• Without claiming the DTAA, you are liable to pay complete tax in India, i.e., 20% STCG or 12.5% LTCG.
• You are also liable to pay tax on the same income in your resident country.
• It results in a total tax of approximately 25-50% unnecessarily on your gains. 

To avoid this type of situation, claim the DTAA benefits in both India and the country where you are currently residing.

Mistake Made During Investment Exit 

The last mistakes generally happen when it comes to the end of your investment or return to India.

No Planning for Fund Repatriation

You can repatriate the principal and gain the amount fully through your NRE account. However, using an NRO account, if you have invested in mutual funds, then per financial year, you can repatriate up to USD 1 million. Many NRIs forget about this until they have to transfer money overseas. So instead of transferring money, first plan ahead to avoid any legal trouble. 

No Plan to Return to India

If you are planning to permanently return to India, 2-3 years before your return, you should plan your mutual fund strategy. Many NRIs do not think about it. They moved to India and realized that their mutual funds were still linked with their NRI accounts, which they needed to convert earlier. 

Considering this, if you correctly convert your accounts, without disruption, your mutual funds continue. In case you don't do so, you face compliance issues. 

These were the common mutual fund investment mistakes that NRIs should avoid while investing in India. Moving ahead, let's know how NRIs can avoid these issues. 

How NRIs Can Avoid These Investment Mistakes?

Here is how NRIs can avoid these investment mistakes:

• Once your residential status changes to NRI, update your KYC. It generally takes 2-4 weeks to process. After updating, all your transactions will be done smoothly.
• If invested in the wrong account type, check whether your AMC allows folio transfer between both account types. In case it did not provide a transfer between accounts, redeem them and reinvest.
• If you have regular plans, then switch to direct plans for the same fund. Generally, no capital gain tax is charged; however, if held for more than a year exit payment may apply. 
• Missed filing ITR on time, under section 139(4), you can file belated tax returns. 
• Forgot to add a nominee, add it. This generally takes 5 minutes online. Additionally, update this across all your investments. 

These were some strategies that you can implement to avoid the common mutual fund mistakes while investing in India. 

Final Thoughts

Lastly, NRIs should be aware of these common mutual fund investment mistakes and make proper strategies to avoid them. By doing so, they can have a successful and smooth investment experience in India, creating a way for a secure financial future. 

Further, if you still have confusion or need guidance with your investments, connect with Savetaxs. Our team of financial experts will solve all your investment-related queries and help you select the right investment plans as per your financial goals without making any mistakes.