NRI Talk: Why quant funds are the future of data-driven investments for NRIs

“Quant funds further enhance this appeal with algorithmic precision, eliminating emotional biases and providing well-diversified portfolios,” says Rohit Beri, CEO and CIO ArthAlpha.

In an interview with ETMarkets, Beri said: “Passive quant funds are usually structured as mutual funds and enjoy the same tax advantage in India based on the nature of capital gains—short-term or long-term,” Edited excerpts:

What are the key trends you’ve observed in NRI investments in India over the past few years, and how have global economic conditions influenced these trends?
Over the past few years, NRI investments in India have shown a remarkable upward trend, driven by both global economic conditions and India’s evolving economic landscape. The inflow of funds into NRI deposits surged by an impressive 84.4%, reaching $11.8 billion between April 2023 and February 2024, compared to $6.40 billion in the same period a year earlier. A significant portion of this growth was attributed to Foreign Currency Non-Resident (FCNR) accounts, which saw inflows of $5.53 billion, up from $1.48 billion a year ago. Total outstanding NRI deposits also climbed, rising from $135.54 billion at the end of February 2023 to $149.72 billion by February 2024.

India’s buoyant economic performance has played a critical role in attracting NRI investments. Supportive regulatory measures, Improved ease of doing business have further catalyzed the asset management industry, opening avenues such as Alternative Investment Funds (AIFs), Portfolio Management Services (PMS), Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (InvITs) for foreign capital.

Additionally, UHNIs among NRIs are increasingly drawn to high-growth sectors like healthcare, electric vehicles, and blockchain. These sectors represent innovative and high-return opportunities, aligning with the preferences of NRI investors looking to capitalize on India’s growth story.

Which sectors or asset classes are currently most attractive to NRIs, and what factors are driving their popularity?

NRIs are predominantly attracted to bank deposits due to their stability and favorable returns. Fixed deposit options like FCNR deposits in foreign currencies (e.g., USD, EUR) safeguard against exchange rate risks, offer fully repatriable funds, and provide tax-exempt interest. NRE deposits, held in Indian rupees, are also tax-free and allow full repatriation.

NRO deposits help manage India-sourced income like rent or dividends but have limited repatriation and are subject to Indian taxes.

However, since recent years, UHNI individuals have begun actively investing in startup spaces including healthcare, AI, Renewables etc. HNIs have a general positive sentiment towards India market and prefer investing across all sectors.

A major driver of NRI inflows is the growing availability of alternative investments like Portfolio Management Services (PMS). These services offer investments in various asset classes based on their risk profile and strategize their investment decisions based on AI/ML models.

How has the Indian government’s focus on infrastructure, green energy, and technology impacted NRI investment interest?
Infrastructure Investment: NRI investments in Indian infrastructure grew by 156% from 2019–2023, reaching $13.6 billion. This trend is expected to continue, driven by initiatives like the National Infrastructure Pipeline.

• Green Energy: India's FDI policy permits up to 100% FDI in the renewable energy sector under the automatic route. India aims to achieve 500 GW of renewable energy capacity by 2030. In FY 2023-24, FDI in India's renewable energy sector surged by 50% year-on-year, reaching $3.7 billion. The cumulative FDI in this sector from FY 2010-11 to FY 2023-24 stands at $17.07 billion, with NRIs contributing approximately 18%.

• Technology Sector: NRI investments in technology reached $8.2 billion in 2022–23, a 42% increase from the previous year, underscoring rising interest in India's innovation-driven sectors.

• Energy Trading Growth: Renewable energy trading platforms like the Green Term Ahead Market (GTAM) and Green Day Ahead Market (GDAM) have seen increased activity, with 341 million units traded on the Indian Energy Exchange (IEX) in February 2023 alone.
These developments highlight India's expanding opportunities for NRI investors in sustainable and tech-focused growth areas.

Quant funds are gaining traction among investors. What are the specific tax advantages for NRIs investing in these funds?
For NRIs, investing in quant funds offers tax treatment similar to other public market investments.

Passive quant funds are usually structured as mutual funds and enjoy the same tax advantage in India based on the nature of capital gains—short-term or long-term—while active quant funds are usually structured as a Portfolio Management Services (PMS) or Alternative Investment Funds (AIFs) are taxed according to the fund structure and underlying asset classes.

However, NRIs from certain jurisdictions, such as the UAE, may benefit from tax exemptions on mutual fund investments under specific conditions, leveraging favorable tax treaties. These aspects make quant funds a viable option, combining strategic returns with jurisdictional tax efficiency.

Why are Quant Funds a Compelling Choice for NRIs Seeking a Data-Driven Investment Approach?
Quant funds leverage advanced algorithms and vast datasets to make precise and informed investment decisions. This data-centric approach eliminates emotional biases and ensures consistent performance.

Their ability to quickly process and adapt to market conditions makes them an attractive alternative for NRIs aiming to optimize returns with scientific precision.

How Do Quant Funds Enhance Risk Management and Portfolio Diversification for NRIs?
Quant strategies employ sophisticated risk management models, enabling comprehensive assessment and mitigation of market risks. By identifying opportunities across sectors, asset classes, and geographies, quant funds create well-diversified portfolios, allowing NRIs to achieve stable growth while minimizing exposure to market volatility.

Tax Implications for NRIs on Mutual Funds
Passive quant funds are usually structured as mutual funds and enjoy the same tax advantage in India based on the nature of capital gains—short-term or long-term—while active quant funds are structured as a Portfolio Management Services (PMS) or Alternative Investment Funds (AIFs) are taxed according to the fund structure and underlying asset classes.

How do quant funds compare to other equity or hybrid mutual funds from a tax-efficiency perspective for NRIs?"
Passive quant funds are usually structured as mutual funds and enjoy the same tax advantage in India based on the nature of capital gains—short-term or long-term—while active quant funds are usually structured similar to a Portfolio Management Services (PMS) or Alternative Investment Funds (AIFs) are taxed according to the fund structure and underlying asset classes.

What are some of the biggest regulatory challenges NRIs face when investing in India, and how can they overcome them?
Regulatory Complexity: NRIs need to follow specific rules based on the type of investment. This includes opening NRO/NRE bank accounts, obtaining Portfolio Investment Scheme (PIS) accounts for stock investments, and complying with restrictions on real estate ownership. Navigating these processes often demands professional assistance.

• Taxation Challenges: Income earned in India may face double taxation. While Double Taxation Avoidance Agreements (DTAAs) help, understanding the relevant treaty and ensuring compliance is often complex. NRIs also face different tax rates on various investments.

• Lack of Local Awareness: Living abroad often means NRIs are less familiar with Indian market trends, local laws, or risks, which can lead to uninformed decisions or exposure to scams.

• Property Management Issues: Owning property in India from abroad comes with its own set of hurdles, including finding reliable tenants, handling maintenance, and resolving legal matters.

• Finding Trusted Advisors: Many NRIs struggle to find credible advisors who can offer genuine guidance, leaving them vulnerable to poor advice or unethical practice
Solutions

• Professional Advice: Engaging a PMS manager can help NRIs overcome regulatory hurdles while offering advanced, data-driven portfolio management. These managers navigate complex regulations, streamline compliance, and offer tailored solutions, ensuring that investments align with goals.

• Thorough Research: Stay informed about market trends and risks to make educated decisions. Quant-focused PMS strategies, especially leveraging AI and ML, provide transparency and adaptability to evolving market conditions, reducing the burden of independent research.

With India’s economy poised for sustained growth, what new opportunities do you foresee for NRIs in terms of investments over the next decade?
NRIs are increasingly moving beyond traditional options, favouring alternative investments like Portfolio Management Services (PMS) and AIFs.

Quant funds further enhance this appeal with algorithmic precision, eliminating emotional biases and providing well-diversified portfolios.

These advanced strategies ensure optimal risk management and adaptability to market trends, making them ideal for NRIs seeking to capitalize on India's innovation and growth while maintaining efficient and transparent portfolio management.

What key policy initiatives or reforms should NRIs watch that could unlock further investment opportunities in India? Anything in the Budget that can be expected, like the RBI increasing the interest on FCNR (b) deposits.
Here are some key measures introduced to attract NRI investments:

1. Higher Interest Rates on FCNR(b) Deposits: The RBI’s competitive interest rates on FCNR(b) deposits have already attracted significant inflows. If the rates are increased further, it could encourage even more NRI participation.

2. Easing Investment Rules: The government has simplified FDI norms and is promoting the use of the Indian Rupee for overseas investments. This is a huge boost for quant funds to invest and raise more capital from foreign investors.

3. Shorter Holding Period for Long-term Assets: The holding period for long-term assets like bonds, debentures, and gold has been reduced from 36 months to 24 months, allowing investors to realize returns faster.

4. NPS now offers higher benefits for NRIs, with employer contributions under Section 80 CCD (2) increasing from 10% to 14% of salary (basic + DA), offering more tax savings and improved returns for a secure future.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)