GIFT City Mutual Funds vs AIFs - Which Suits Retail NRIs

"I have $10,000 to invest. Should I put it in a GIFT City mutual fund or wait until I can afford an AIF?"

We hear this question every week in our Belong WhatsApp community. The confusion is understandable. 

Both options live under the same roof at GIFT City. Both promise tax benefits. Both claim to be perfect for NRIs.

But they serve very different purposes.

After helping thousands of NRIs navigate GIFT City investments, we've noticed a pattern. People jump into AIFs chasing "exclusive" returns. Others dismiss mutual funds as "too basic." Both assumptions cost money.

This guide breaks down exactly when mutual funds make sense, when AIFs do, and the specific scenarios where one clearly beats the other for retail NRI investors like you.

Why This Decision Matters More Than You Think

The choice between GIFT City mutual funds and AIFs isn't just about minimum investment amounts. It affects your liquidity, your tax planning, your ability to exit, and ultimately your returns.

Get it wrong, and you could lock up AED 275,000+ for three years in an AIF when a $500 mutual fund would have served you better. 

Or you could keep parking money in mutual funds while missing out on genuinely superior AIF strategies that match your risk profile.

The stakes are real. Let's get specific.

What Are GIFT City Mutual Funds?

GIFT City mutual funds are investment schemes launched by Asset Management Companies operating within Gujarat International Finance Tec-City. India's only International Financial Services Centre (IFSC).

These funds fall under IFSCA regulation. Not SEBI. This matters because IFSCA rules mirror global financial hubs like Singapore and Dubai. The regulatory framework feels familiar if you've invested internationally.

The breakthrough came in September 2025. Tata Asset Management received IFSCA approval for the Tata India Dynamic Equity Fund with a minimum investment of just $500 (Source: Business Standard).

Before this, GIFT City was essentially closed to retail investors. You needed $150,000 minimum to participate. Now, any NRI can access tax-efficient Indian equity exposure with what amounts to a month's savings.

👉 Tip: Explore current GIFT City mutual fund options using our GIFT City Mutual Funds tool. We track every launch and rate change.

What Are AIFs in GIFT City?

​Alternative Investment Funds (AIFs) pool capital from sophisticated investors to invest in assets beyond traditional stocks and bonds. Think private equity, venture capital, hedge fund strategies, real estate, and infrastructure.

IFSCA classifies AIFs into three categories:

Category I AIFs invest in startups, SMEs, and social ventures. They receive government incentives because they support economic growth.

Category II AIFs cover private equity funds, debt funds, and fund-of-funds. They cannot use leverage except for daily operations.

Category III AIFs employ complex strategies. Hedge funds, long-short equity, and derivatives trading fall here. They can use leverage through derivatives.

The minimum investment for AIFs in GIFT City dropped from $150,000 to $75,000 in February 2025 (Source: IFSCA Fund Management Regulations 2025). Still substantial. But significantly more accessible than before.

For context, $75,000 equals roughly AED 275,000 or ₹63 lakh at current rates.

The Core Differences at a Glance

This table tells part of the story. The real differences run deeper.

Tax Treatment: Where the Real Advantage Lives

Here's what most articles get wrong. They say "GIFT City = tax free" without explaining the nuances.

Let's be precise.

For GIFT City Mutual Funds:

Capital gains on redemption are exempt under Section 10(4D) of the Income Tax Act. No TDS is deducted. 

No Indian ITR filing is required if this is your only Indian income. The exemption applies regardless of holding period. Short-term or long-term, the Indian tax treatment is the same: exempt.

For Category III AIFs:

Category III AIFs investing in Indian equity mutual funds are fully exempt from capital gains tax in India. Taxable only in your country of residence (Source: Income Tax Act Section 10(4D), IFSCA Fund Management Regulations 2022).

For Category I and II AIFs:

These have "pass-through" status. Tax is calculated at the fund level. When you redeem, there's no additional tax. You may not even need a PAN card or file Indian returns if you invest exclusively through these AIFs and they've already deducted applicable taxes.

The UAE Advantage:

For UAE-based NRIs, this creates a genuinely tax-free situation. No income tax in UAE plus no capital gains tax in GIFT City equals 100% tax-free returns on qualifying investments.

This is why we consistently recommend GIFT City investments to NRIs in the Gulf.

👉 Tip: Understand your complete tax position on investments before committing capital. Tax treatment depends on your residency status and which country you live in.

The Liquidity Question: Can You Actually Access Your Money?

This is where mutual funds and AIFs diverge dramatically.

Mutual Fund Liquidity:

GIFT City mutual funds (like the Tata India Dynamic Equity Fund) are open-ended. You can redeem any business day. 

Settlement typically happens within T+1 to T+3 days. Your money comes back to your foreign currency account without restrictions.

Need cash for an emergency? Submit a redemption request. Receive funds within a week.

AIF Liquidity:

Most AIFs in GIFT City have lock-in periods ranging from 1 to 3 years. Some extend to 5 years. This isn't a quirk. It's by design.

AIFs invest in illiquid assets. Private equity deals. Structured debt. Real estate projects. The fund manager needs time to execute strategies. Early redemptions would force asset fire sales.

If you invest $75,000 in a Category III AIF with a 3-year lock-in, you cannot access that money regardless of circumstances. 

Family emergency? Medical bills? Business opportunity? 

The capital stays locked.

We've seen NRIs underestimate this. They treat AIF investments like FDs with better returns. They're not. They're commitment-heavy products that demand capital stability.

👉 Tip: Never invest in AIFs with money you might need within the lock-in period. This sounds obvious but causes real problems for families who don't plan.

Risk Profiles: Understanding What You're Actually Buying

Mutual Fund Risk:

The Tata India Dynamic Equity Fund invests in other Tata mutual fund schemes and ETFs. It provides exposure to large, mid, and small-cap Indian equities through a diversified approach.

The fund allocates 50-100% to broad-based funds and 0-50% to sectoral and thematic opportunities (Source: Tata Asset Management). You get market risk. If Nifty falls 10%, your fund will feel it.

But you also get professional management, diversification, and the ability to exit.

AIF Risk:

AIFs carry different risks depending on category.

Category I AIFs (venture capital) carry startup failure risk. Many startups fail. Your returns depend on the few that succeed.

Category II AIFs (private equity) carry illiquidity risk and valuation risk. Privately held companies don't have market prices. Valuations are estimates until exit.

Category III AIFs (hedge funds) carry strategy risk. Complex trading strategies can generate alpha. They can also generate significant losses in volatile markets. The manager's skill matters enormously.

A good hedge fund might only fall 2% when Nifty drops 10%. A bad one might fall 15%.

The Real Decision Framework

Stop thinking about this as "mutual funds vs AIFs." That framing misses the point.

Think instead about these questions:

How much can you invest?

If you have less than $75,000 available for GIFT City investments, the decision is made. Mutual funds are your only option. And that's fine. 

The Tata India Dynamic Equity Fund offers genuine tax-efficient access to Indian markets.

If you have $75,000+ and want to diversify beyond mutual funds, AIFs become viable.

When might you need this money?

Planning to use these funds for your child's education in 2 years? Home purchase in 18 months? Business capital infusion next year?

Mutual funds. No question.

If this is genuine long-term wealth that you won't touch for 5+ years, AIFs become more attractive.

What's your existing portfolio look like?

If you already have substantial equity exposure through regular Indian mutual funds or direct stocks, adding more equity through GIFT City mutual funds just increases concentration.

An AIF with a different strategy adds diversification. A private credit AIF generating fixed returns complements equity holdings. A hedge fund with downside protection balances aggressive growth positions.

How sophisticated is your investment knowledge?

Mutual funds are straightforward. You invest. The fund manager handles allocation. You track NAV.

AIFs require more understanding. You need to evaluate fund manager track records. Understand strategy nuances. Read placement memorandums. Assess fee structures (typically 2% management fee plus 20% performance fee).

If that sounds overwhelming, stick with mutual funds until you're ready.

A Practical Scenario: Two NRIs, Two Different Paths

Scenario 1: Priya, Dubai-based Software Engineer

Priya earns AED 25,000 monthly. She has about AED 50,000 ($13,600) saved that she wants to invest in India for the long term. She already has an NRE FD and some stocks through Zerodha.

She can't meet the $75,000 AIF minimum. Even if she could, locking up her entire savings for 3 years feels risky.

The smart move: Invest $10,000 in GIFT City mutual funds. Keep the rest liquid. Continue monthly investments as her savings grow.

Scenario 2: Rajesh, Abu Dhabi-based Finance Director

Rajesh has AED 400,000 ($109,000) earmarked for long-term wealth building. He already owns property in India, has substantial NRE FDs, and holds mutual funds. He's 45 and planning for retirement.

He wants safe investments with reasonable returns, but also diversification beyond traditional options.

The smart move: Split the capital. Put $75,000 in a Category III AIF with a respected fund manager. Invest $30,000 in GIFT City mutual funds for liquidity. Keep the rest in USD FDs at GIFT City for stability.

Both paths are valid. Both serve different needs.

👉 Tip: Use our NRI FD rates comparison tool to find the best fixed deposit rates if you want to balance your portfolio with guaranteed returns.

What Most Blogs Miss: The Hidden Costs

Mutual Fund Costs:

Expense ratios typically run 1-2% annually. For the Tata India Dynamic Equity Fund, check the offer document for exact figures. These fees are deducted from NAV, so you don't pay them separately. They just reduce your returns.

No entry load. Exit loads may apply for early redemptions (typically 1% if you exit within 1 year).

AIF Costs:

This is where things get expensive.

Most AIFs charge:

• 2% annual management fee on committed capital (not just invested capital)
• 20% performance fee on returns above a hurdle rate

If your AIF returns 15% and the hurdle is 8%, the manager takes 20% of the 7% excess. That's 1.4% of your capital going to fees on top of the 2% management fee.

On $75,000, you could pay $1,500+ in annual fees to a manager regardless of performance, plus another $1,000+ in performance fees if the fund does well.

Some AIFs have higher fees. Some have catch-up provisions that benefit managers even more.

Read the placement memorandum carefully. Every. Single. Line.

The Return-to-India Angle

Planning to move back to India within the next few years? This changes the calculation.

GIFT City's tax advantages are designed for NRIs. If you return and become a Resident, the tax treatment may change. 

You can continue holding GIFT City funds, but consult a tax advisor about implications.

The RNOR status provides a transition period. For up to 2-3 years after returning, you may retain non-resident tax treatment on foreign income.

But AIF lock-in periods don't care about your residency status. If you invest in a 3-year AIF and return to India after 1 year, you're still locked in for 2 more years. Your tax position may change during that period.

Mutual funds offer flexibility. You can redeem before moving. Or hold and evaluate your tax position under RNOR status.

👉 Tip: If you're planning to return to India within 3-5 years, favor liquid investments. Read our guide on financial planning for returning NRIs for detailed steps.

Regulatory Protection: Who Watches Your Money?

Both mutual funds and AIFs in GIFT City fall under IFSCA oversight. This provides regulatory comfort.

However, there's a key difference from mainland India investments.

GIFT City operates outside RBI's direct jurisdiction. Your GIFT City FDs, for example, are not covered under DICGC deposit insurance (the ₹5 lakh protection that covers regular NRE/NRO FDs).

Similarly, GIFT City mutual funds don't have the same investor protection mechanisms as SEBI-regulated mutual funds.

This doesn't mean GIFT City is unsafe. IFSCA implements global best practices. Fund managers must maintain adequate capitalization. AML and CFT guidelines ensure compliance.

But understand what you're getting. GIFT City trades some traditional protections for tax efficiency and flexibility.

Making Your Decision: A Simple Framework

Use this framework:

Choose Mutual Funds if:

• Your investable amount is under $75,000
• You might need the money within 3 years
• You want simplicity and transparency
• You're new to GIFT City investing
• You prefer market-linked returns with daily liquidity

Choose AIFs if:

• You can commit $75,000+ for 3+ years
• You want diversification beyond traditional equity
• You understand complex investment strategies
• You've evaluated the specific fund manager's track record
• You're comfortable with illiquidity in exchange for potential alpha

Consider Both if:

• You have $150,000+ to allocate
• You want liquidity AND alternative exposure
• You're building a comprehensive investment portfolio

What's Coming Next

The GIFT City ecosystem is evolving rapidly.

More Retail Launches: Following Tata's success, multiple AMCs including Nippon India and Mirae Asset are developing retail schemes with $500-1,000 minimums.

Lower AIF Thresholds: Industry expects further relaxation of minimum investment requirements to attract mid-tier HNIs.

Tax-Neutral Relocation: From April 2026, mutual funds and ETFs can relocate to GIFT City from offshore jurisdictions (Mauritius, Singapore) without triggering capital gains tax. This will bring more fund options.

The government extended GIFT City's tax holiday through March 2030 in Union Budget 2025, providing five years of policy certainty.

👉 Tip: Track market movements using our Gift Nifty tool to time your investments better.

The Bottom Line

GIFT City mutual funds and AIFs aren't competing products. They're different tools for different situations.

Mutual funds democratized GIFT City access. With $500, any NRI can now participate in India's growth story with genuine tax advantages. This is revolutionary for retail investors.

AIFs remain specialized vehicles for those with larger capital, longer time horizons, and appetite for alternative strategies.

Most retail NRIs should start with mutual funds. Build familiarity with GIFT City. Understand the mechanics. Then consider AIFs once you have substantial capital and genuine diversification needs.

Don't chase AIFs because they sound "exclusive." Don't dismiss mutual funds because they seem "basic." Choose based on your actual circumstances.

Join our WhatsApp community where many NRIs discuss GIFT City strategies, share experiences, and get answers to specific questions.

Download the Belong app to explore GIFT City mutual funds, compare AIFs, and access tools built specifically for NRIs like you.