Why NRIs Should Invest in Liquid Funds?

For NRIs, investing in liquid funds is a good option. These funds, while offering accessibility, provide better returns than your savings accounts. With maturity periods of up to 91 days, these liquid debt mutual funds invest in debt and money-market instruments. This makes them a low-risk investment option for NRIs managing their finance across borders. 

Further, because of the short lending tenure, among all mutual funds, liquid funds are the safest investment options for NRIs. Still unsure whether to invest in these funds or not? Read the blog to clear up any confusion about the funds and choose the right investment option.

What Are Liquid Funds?

A liquid fund is a specialized type of debt mutual fund. These funds invest in short-term financial instruments with a maximum maturity of 91 days. It offers a balance between returns, safety, and accessibility for NRIs to manage funds across countries. 

When you invest in these funds, your money goes into high-quality debt instruments. It includes Certificates of Deposit (CDs), Treasury Bills (T-Bills), Collateralized Lending and Borrowing Obligations (CBLO), and Commercial Papers (CPs). The key objective of these funds is to preserve capital while maintaining high liquidity and offering competitive returns.

Further, these funds concentrate on ultra-short-term securities. Considering this, fund managers certify that the portfolio's average maturity does not exceed 3 months. Compared to other NRI investment options, these significantly reduce both credit and interest rate risk.

In several key aspects, liquid funds function differently from other mutual funds:

• NAV Calculation: Unlike other debt mutual funds, which calculate the Net Asset Value only on business days, liquid funds are calculated for their NAV for all 365 days.
• Speed of Redemption: Within 24 hours on a T+1 basis (next business day), generally, withdrawals are processed. Additionally, some funds also offer instant redemption.
• Risk Profile: In the debt funds category, because of a short maturity period, liquid funds carry the lowest interest rate risk. 

This was all about liquid funds. Moving ahead, let's know the reasons why NRIs should invest in these mutual funds. 

Key Reasons for NRIs to Invest in Liquid Funds

Liquid funds offer several benefits to NRIs that address the unique financial challenges faced by them while managing their funds across borders. Considering this, here are some key reasons why NRIs should invest in liquid funds:

• Higher Returns: Liquid funds generally provide income returns of 7-8%, considerably more than traditional savings accounts. This makes them an ideal option for NRIs seeking to produce better returns on little money while maintaining accessibility.
• Low Risk Profile: Among the other mutual funds, the liquid funds stand out as one of the safest investment options. The lower volatility and short lending tenure, compared to other debt funds, keep the NAV relatively stable. After investing for a month, you usually cannot lose your money.
• Quick Access to Funds: Generally, redemption requests are processed within a single working day. It certifies the availability of funds when you need them. Considering this, many liquid funds offer the facility of instant redemption for withdrawals of a maximum of NR 50,000 per day. This makes liquid funds a suitable investment option for urgent financial needs.
• Emergency Fund Solution: For NRIs, liquid funds are a good emergency fund option. The combination of accessibility, stability, and reasonable returns makes these funds an ideal choice for setting aside money for unforeseen expenses. Further, to ensure the repatriation process proceeds smoothly, make the investment through an NRE account. It is an essential consideration for NRIs when managing their finances across borders. 

These were some of the key reasons why NRIs should invest in liquid funds. Moving on, let's look at the top-performing liquid funds available to NRIs in India.

Top Performing Liquid Funds for NRIs

The table below showcases the top-performing liquid funds for NRIs and residents:

These were some of the top-performing liquid funds available for NRIs to invest in India. Moving ahead, let's know how NRIs can invest in these funds. 

How NRIs Can Invest in Liquid Funds?

Being an NRI, the process of investing in liquid funds includes several straightforward steps that you can complete from overseas.

Step 1: Set Up Your Bank Account

To invest in liquid funds, you should either have a Non-Resident External (NRE) or Non-Resident Ordinary (NRO) bank account with an Indian bank. In the NRE account, your foreign currency earnings convert to Indian rupees. However, an NRO account manages your income earned within India. This step is important for NRIs, as in India, mutual fund companies cannot accept foreign currency investments. 

Step 2: Get Your PAN Card

To invest in liquid mutual funds in India or conduct financial transactions, it is vital to have a PAN card. If you don't have it, first Apply for the PAN Card, then proceed with the investment process. 

Step 3: Complete Your KYC Process

For all mutual fund investors, it is vital to complete the Know Your Customer (KYC) process. Considering this, you need to provide the following things:

• A copy of your PAN card
• Passport-sized colored photographs
• Self-attested passport copies
• Birth certificate (optional)
• Address proof (identity proof of overseas)
• Canceled cheque or bank statement
• FATCA declaration

Step 4: Select Your Investment Platform

There are two ways by which you can invest in liquid mutual funds, i.e., through the website of the mutual fund or via a registered broker. Considering this, investing directly through the website of the fund house can be cost-effective as it generally charges lower fees. On the other hand, using a broker can provide professional guidance and help you navigate the investment process. 

Step 5: Monitor Your Investments

After investing in liquid funds, it is vital to monitor their performance regularly. In this, compare your financial goals to your investments. Monitoring your investments helps you certify that you are on track to fulfill your financial objectives. 

This is how NRIs can invest in liquid funds. Moving on, let's look at the tax implications for NRIs. 

Tax Implications for NRIs

For NRIs, the taxation rules on the liquid funds are the same as for residents. However, Tax Deducted at Source (TDS) is applied at the time of redemption.

• Under Section 115A, since the liquid funds are treated as short-term capital gains (held for 36 months), 30% TDS is imposed on capital gains.
• NRIs paid 20% TDS on the dividends plus applicable surcharge and cess. 
• During ITR filing in India, NRIs can claim the excess TDS.
• Under FEMA rules for NRI mutual fund, investment should be made through an NRE or NRO account.
• If you submit the relevant documents on time, you can apply for the DTAA (Double Taxation Avoidance Agreement) benefits and reduce your TDS liability. It also helps you avoid double taxation on mutual fund gains. 

Further, using the NRE account, you can fully repatriate the principal and gains amount. However, under the RBI rules for NRI investment, using the NRO account, you can transfer only the capital gain and principal amount up to a specified limit, i.e., USD 1 million per financial year.

Final Thoughts

Lastly, for NRIs, liquid funds are a superior alternative to traditional savings accounts and fixed deposits. It is because with unfettered access to your invested amount, it combines competitive returns. Additionally, liquid funds are an ideal choice for NRIs seeking immediate financial benefits. 

Furthermore, if you need any assistance with your investments in India, contact Savetaxs. We have a team of financial experts who can help you make the right investment decisions. Additionally, they can also help you with your tax obligations in India.