Best Investment Choices for US NRIs in Indian Stocks: a Rolling Returns Analysis
The article uses rolling returns to compare various investment options for US-based NRIs intending to invest in the Indian stock market.
Best Investment Choices for US NRIs in Indian Stocks: a Rolling Returns Analysis
Posted on 17 Dec 2023
Author: Sayan Sircar
Tags: 
NRI
10 mins read
NRI
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The article uses rolling returns to compare various investment options for US-based NRIs intending to invest in the Indian stock market.
📚 Topics covered:
- Understanding the Investment Options
- Performance Analysis
- Effect of the exchange rate
- What should a US-based NRI do to invest in Indian stocks?
This article is the second part of our analysis of various investment options available to the US-based NRI for investing in the Indian stock market. Please make sure that you have read the first part here: Wall Street or Dalal Street: which is the best option for US NRIs to invest in Indian stocks based on PFIC rule?
Warning: Taxes paid under PFIC are not refunded if you leave the US and come back to India. This rule will lead to severely lower returns on Indian mutual funds (and other PFIC eligible investments) in case you have paid the tax already.
Understanding the Investment Options
We will consider these cases:
- Case 1: Investment in Nifty MF and the money is kept in India
- Case 2: Investment in Nifty MF and the money is repatriated back to the US
- Case 3: Investments in Nifty US ETF and the money is kept in the US
Case 1: Indian MF without repatriation
Investment Strategy: An investment approach where a US-based investor regularly invests funds in an Indian Nifty 50 index fund.
Tax Implications: Subject to PFIC rules, the investor pays tax on unrealised gains every year in the US at a combined (federal plus state) rate (assumed) of 32%. A 20% capital gains tax in India and the US under DTAA is paid on the final capital gains. If you have paid taxes in the US under PFIC, these will not be refunded in case you move back to India.
End Corpus: The invested funds remain in the Indian stock market and are not repatriated out of India.
Case 2: Indian MF with repatriation
Investment Strategy: An investment approach where a US-based investor regularly invests funds in an Indian Nifty 50 index fund.
Tax Implications: Subject to PFIC rules, the investor pays tax on unrealised gains every year in the US at a combined (federal plus state) rate of 32%. The final capital gains tax is 20%, just as the first option.
End Corpus: The invested funds are repatriated out of India at the end of the investment period.
Case 3: US-domiciled ETF (Exchange-Traded Fund)
Investment Strategy: Investment in the Indian stock market, specifically the stocks in the Nifty 50 index, through a US-domiciled ETF. This is a passive fund tracking the Nifty 50 index.
Tax Implications: Held in a tax-deferred IRA, allowing for tax benefits or tax deferral for US taxpayers.
End Corpus: The investment is held within the ETF structure domiciled in the US, and no taxes need to be paid until retirement due to the IRA.
In each case, we will consider
- $1000 invested per month. We cover both a constant $1000/month SIP and one with a 10% increase in the SIP amount per year
- We consider a 3-year and 5-year SIP. You will sell the units a month after the last investment
- USD/Rupee Exchange rates on the day of transfer used for cases 1 and 2
- Investment in the Nifty US ETF considered with dividend reinvestment held in a non-taxable IRA (and not a taxable brokerage account)
- 32% state and federal tax bracket for the investor. 20% tax, total in India and the US, on selling the units in cases 1 and 2
Performance Analysis
We have taken two options for investing:
- a fixed amount every month
- a fixed amount every month, but the amount is increased by 10% the following year
For all 3y and 5y SIP investments, we show the return maximum, minimum, average, risk and return per unit risk.
The metric “Return/Risk” provides a ratio that combines return and risk to offer insights into the efficiency of an investment option in generating returns concerning the level of risk taken. Higher values of this metric typically indicate a better return vs the risk incurred.
Fixed investment of $1000/month
| Metric | Indian MF | Indian MF Repatriated | US ETF |
|---|---|---|---|
| Maximum | ——- | ——- | ——- |
| Any 3Y period | 20.15% | 17.67% | 17.18% |
| Any 5Y period | 14.36% | 11.34% | 12.02% |
| Average | ——- | ——- | ——- |
| Any 3Y period | 7.08% | 3.67% | 5.52% |
| Any 5Y period | 6.06% | 2.38% | 4.43% |
| Minimum | ——- | ——- | ——- |
| Any 3Y period | -1.64% | -3.36% | -10.20% |
| Any 5Y period | -2.54% | -1.09% | -3.57% |
| Risk | ——- | ——- | ——- |
| Any 3Y period | 16.27% | 17.02% | 20.51% |
| Any 5Y period | 11.56% | 10.28% | 14.70% |
| Return/Risk | ——- | ——- | ——- |
| Any 3Y period | 44% | 22% | 27% |
| Any 5Y period | 52% | 23% | 30% |
Increasing investment of $1000/month (10% a year)
| Metric | Indian MF | Indian MF Repatriated | US ETF |
|---|---|---|---|
| Maximum | ——- | ——- | ——- |
| Any 3Y period | 20.57% | 18.08% | 17.07% |
| Any 5Y period | 15.18% | 12.16% | 12.12% |
| Average | ——- | ——- | ——- |
| Any 3Y period | 7.20% | 3.86% | 5.52% |
| Any 5Y period | 6.30% | 2.60% | 4.44% |
| Minimum | ——- | ——- | ——- |
| Any 3Y period | -1.89% | -3.01% | -10.19% |
| Any 5Y period | -0.09% | -0.53% | -3.55% |
| Risk | ——- | ——- | ——- |
| Any 3Y period | 16.71% | 17.33% | 20.54% |
| Any 5Y period | 12.23% | 11.03% | 14.70% |
| Return/Risk | ——- | ——- | ——- |
| Any 3Y period | 43% | 22% | 27% |
| Any 5Y period | 52% | 24% | 30% |
Some observations on the results:
- Efficiency in Returns: The Indian MF exhibits a more efficient return generation concerning the risk taken, as indicated by its higher “Return/Risk” ratio compared to Indian MF (Repatriated) and US ETF.
- Consistent Superiority: Across both 3-year and 5-year periods, Indian MF consistently maintains a higher “Return/Risk” ratio, suggesting that it might be more effective in generating returns relative to the risk involved compared to the other options.
- Risk-Adjusted Performance: The “Return/Risk” metric emphasizes the importance of not only returns but also the risk incurred. Indian MF’s higher ratio signifies a potentially better risk-adjusted performance compared to Indian MF (Repatriated) and US ETF.
- Investment Efficiency: Investors seeking a balance between returns and risk might find Indian MF comparatively more efficient in delivering returns considering the risk undertaken.
Effect of the exchange rate
As an investor, you should keep in mind that the USD Rupee exchange rate movement impacts returns:
- When you send money to India for investment, the exchange rate on the day of remittance is to be considered
- When you repatriate the amount from India back to the US again, the amount of dollars you get will depend on the latest exchange rate
- When you invest via the US ETF, the exchange rate comes into play whenever the ETF sends money to India and repatriates it back to the US to handle redemptions
What should a US-based NRI do to invest in Indian stocks?
We will reiterate the same conclusions as in our previous article: Wall Street or Dalal Street: which is the best option for US NRIs to invest in Indian stocks based on PFIC rule?
Invest in Indian stocks only if you are planning to come back to India
Of the three options explored here, the highest returns have come when the NRI has sent money to India, paid the taxes on the capital gains in the US and spent the money in India for some purpose. Alternatively, if the plan is to come back to India, then investing in Indian stocks makes sense.
Invest only in US-domiciled assets if the money is to be used in the US
The worst return has come in case that money, instead of being spent in India, is repatriated back to the US. If repatriation is needed, investing in the US-domiciled ETF is better.
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