GIFT City Mutual Funds vs NRE Fixed Deposits - Which is Better

Two NRIs in our WhatsApp community made opposite decisions last year.

Khalid put AED 200,000 into an NRE FD at 7%. Twelve months later, he had his guaranteed interest. But when he converted it back to dirhams, the rupee had depreciated 4%. His real return? About 3%.

Fatima invested the same amount in a GIFT City equity mutual fund. Her returns hit 14% in dollar terms. No currency loss. No TDS deduction. She kept it all.

But here's what Fatima didn't tell you: In 2022, her GIFT City fund dropped 18% in six months. She held her nerve. Khalid's FD? Rock steady through the same period.

Neither option is universally "better." The right choice depends on your goals, timeline, and stomach for volatility.

At Belong, we help NRIs navigate exactly this decision every day. This guide breaks down both options honestly, so you can choose what fits your situation.

The Core Difference: Guaranteed vs Growth

Before diving into details, understand this fundamental distinction.

NRE Fixed Deposits give you a guaranteed return. You know exactly what you'll get at maturity. The bank promises 7%, you get 7% (in rupees). No surprises.

GIFT City Mutual Funds are market-linked. Your returns depend on how the underlying stocks or bonds perform. In good years, you might earn 15-20%. In bad years, you could lose money.

One offers certainty. The other offers potential.

Which matters more to you? That's the real question.

👉 Tip: If losing 20% of your investment would keep you awake at night, lean toward NRE FDs. If you can wait 5+ years and handle volatility, GIFT City funds may serve you better.

Quick Comparison: The Numbers

Sources: ICICI Bank NRI rates, IFSCA Regulations, Bank websites December 2025

Currency Risk: The Hidden Factor

This is where most NRIs get the math wrong.

NRE FD scenario:

You invest $25,000 when USD-INR is ₹83. That's ₹20,75,000 in your FD.

At 7% for 3 years (compounded quarterly), you get approximately ₹25,70,000 at maturity.

But if the rupee weakens to ₹88 per dollar by then (a realistic scenario given historical trends), your dollars become: $29,200.

Effective return in USD? About 5.3% total over 3 years, not the 24% you expected.

The rupee has depreciated roughly 3-4% annually against the dollar over the past decade (Source: RBI). This eats into your NRE FD returns.

GIFT City Mutual Fund scenario:

You invest $25,000. It stays as $25,000. No conversion.

If the fund grows 10% annually, after 3 years you have approximately $33,275.

Your return is $33,275. In dollars. No currency math needed.

👉 Tip: Track currency movements using our Rupee vs Dollar Tracker before making large NRE FD investments.

Return Potential: What Can You Actually Expect?

NRE FDs: Predictable but Limited

Current rates (December 2025):

IndusInd Bank: 7.00% p.a. for 1 year. Yes Bank: Up to 7.50% p.a. HDFC, ICICI, Axis, SBI: 6.50-6.60% p.a. Small Finance Banks: Up to 7.75% p.a.

(Source: BankBazaar, PolicyBazaar)

These rates are locked at booking. If rates fall next year, your FD keeps earning the old rate. That's the upside of guaranteed returns.

But here's the catch: 7% barely beats Indian inflation (5-6%). In real terms, your purchasing power grows slowly.

GIFT City Mutual Funds: Variable but Higher Ceiling

GIFT City funds come in different flavors:

Inbound equity funds (investing in Indian stocks): Historical returns of 12-15% p.a. over 5-year periods. Outbound equity funds (investing in global stocks): Returns vary by market. Debt funds: 6-8% p.a. with lower volatility. Hybrid funds: 8-12% p.a. with balanced risk.

The Tata India Dynamic Equity Fund launched in GIFT City targets Indian equity exposure with USD denomination. The DSP Global Equity Fund offers global diversification.

But remember: past performance doesn't guarantee future returns. In 2022, many equity funds lost 15-20%.

Tax Treatment: Both Can Be Tax-Free

This is where both options shine for NRIs.

NRE FD Tax Treatment:

Interest is completely exempt from Indian income tax under Section 10(4) of the Income Tax Act. No TDS deducted. You receive full interest.

For UAE-based NRIs, this means zero tax globally since UAE has no personal income tax.

GIFT City Mutual Fund Tax Treatment:

Income from specified funds registered under IFSCA regulations is exempt under Section 10(4D). No TDS on redemptions. Capital gains are tax-free in India for non-residents investing in qualifying fund structures.

For UAE NRIs, the math is similar: zero tax in India, zero tax in UAE.

However, if you're in the UK or US, you must report income in your resident country. UK NRIs face Self Assessment requirements. US NRIs face potential PFIC complications with mutual funds.

👉 Tip: UAE NRIs get the best of both worlds. Zero tax on NRE FDs AND GIFT City funds. Use our Residential Status Calculator to confirm your status.

Safety: Where's Your Money More Secure?

NRE FDs: Government-Backed Insurance

NRE fixed deposits are covered by DICGC (Deposit Insurance and Credit Guarantee Corporation) up to ₹5 lakh per depositor per bank. This includes both principal and interest (Source: DICGC).

If the bank fails, you get your money back (up to the limit). This is automatic. You don't need to apply.

For deposits above ₹5 lakh, stick to large, stable banks: SBI, HDFC, ICICI, Axis. The slightly lower rates (6.5% vs 7.5%) come with significantly lower risk.

GIFT City Mutual Funds: Market-Regulated, Not Insured

GIFT City funds are regulated by IFSCA, not covered by deposit insurance. If the fund loses money due to market movements, there's no guarantee.

However, your money is held by regulated custodians. The fund house can't run away with it. If the AMC shuts down, your investments transfer to another fund house.

The risk isn't fraud. The risk is market performance.

Liquidity: How Quickly Can You Access Money?

NRE FDs: Locked but Flexible

Minimum tenure is 1 year. You can't withdraw before 12 months without losing all interest.

After 1 year, premature withdrawal is allowed with a penalty (typically 0.5-1% reduction in interest rate). Some banks charge more.

Most banks offer loans against NRE FDs at 1-2% above FD rate. This preserves your deposit while providing liquidity.

GIFT City Mutual Funds: More Liquid

Open-ended funds allow redemption anytime. No lock-in (except for certain fund structures like AIFs).

Redemption typically takes 2-4 business days for equity funds, 1-2 days for liquid/debt funds.

Exit loads may apply for early redemption (usually 1% if redeemed within 1 year).

For emergencies, mutual funds offer faster access to your money.

👉 Tip: Keep 3-6 months of expenses in easily accessible instruments. If you're fully in NRE FDs, ensure you have a liquid fund or savings buffer for unexpected needs.

Minimum Investment: Entry Barriers

NRE FDs: Accessible

Most banks accept NRE FDs from ₹25,000 to ₹1 lakh minimum:

ICICI Bank: ₹25,000. HDFC Bank: ₹25,000. SBI: ₹1,000 (general), ₹50,000 (metro branches).

You can start small and add more over time.

GIFT City Mutual Funds: Varies by Type

Retail mutual funds: As low as $500 (Tata launched their Dynamic Equity Fund at $500 minimum in September 2025). AIFs (Alternative Investment Funds): $75,000 minimum (reduced from $150,000 in February 2025). PMS (Portfolio Management Services): $75,000-$150,000.

The retail fund route has become accessible. AIFs remain for high-net-worth NRIs.

Compare options using our GIFT City Mutual Funds Explorer.

Repatriation: Getting Money Back

Both options offer full repatriation, but the mechanics differ.

NRE FD Repatriation:

Both principal and interest are 100% repatriable. No RBI approval needed. Transfer directly to your overseas account via SWIFT. No annual limits.

Simple and straightforward.

GIFT City Mutual Fund Repatriation:

Investments are made in foreign currency (USD). Redemptions come back in foreign currency. No conversion to INR and back. Direct transfer to your overseas account.

Even simpler. No currency conversion means no forex charges on exit.

Learn more about repatriation rules in our detailed guide.

The Rupee Depreciation Math

Let's get specific about currency impact.

Historical INR-USD Movement:

2015: ₹63 per USD. 2020: ₹74 per USD. 2025: ₹84 per USD.

That's roughly 33% depreciation over 10 years, or about 3% annually (Source: RBI Exchange Rate Data).

What This Means for a $50,000 Investment Over 5 Years:

NRE FD at 7%:

Initial conversion: $50,000 × 84 = ₹42,00,000. After 5 years at 7%: ₹58,90,000. If INR weakens to ₹95/USD: $62,000 effective value.

Total gain in USD: $12,000 (24% over 5 years, ~4.4% p.a.)

GIFT City Equity Fund at 10%:

Investment: $50,000 (stays in USD). After 5 years at 10%: $80,525.

Total gain in USD: $30,525 (61% over 5 years, ~10% p.a.)

The difference: $18,500 in your pocket.

Of course, the 10% return isn't guaranteed. The fund could also return 5% or -5%.

👉 Tip: If you plan to eventually spend money in India (retirement, property), rupee depreciation matters less. If you'll repatriate to UAE/US/UK, currency protection is crucial.

Who Should Choose NRE Fixed Deposits?

NRE FDs make sense if:

1. You're risk-averse

You can't tolerate seeing your portfolio drop 20%. Sleep matters more than extra returns.

2. You have a specific rupee goal

You're saving for a property purchase in India, children's education in India, or retirement in India. You'll spend in rupees anyway.

3. You need predictable income

You want quarterly or annual interest payouts for regular expenses. FDs offer this with certainty.

4. Your investment horizon is short

For money needed within 1-3 years, guaranteed returns beat market volatility.

5. You're in a tax jurisdiction that complicates foreign fund investments

US NRIs facing PFIC rules might find NRE FDs simpler despite currency risk.

Who Should Choose GIFT City Mutual Funds?

GIFT City funds make sense if:

1. You can handle volatility

You understand that 15% gains some years come with 15% losses other years. You won't panic-sell.

2. Your timeline is 5+ years

Over longer periods, equity funds historically outperform fixed deposits. Time smooths out volatility.

3. Currency protection matters

You'll repatriate to UAE, UK, or US. You earn in foreign currency and want returns in foreign currency.

4. You want growth, not just preservation

FDs barely beat inflation. Equity funds build wealth over time.

5. You're in a zero-tax jurisdiction

UAE, Singapore, Hong Kong NRIs get maximum benefit. No tax in India, no tax at home.

6. You want to diversify

GIFT City offers access to global equities, emerging markets, and alternative assets that NRE FDs can't provide.

Why Not Both? The Smart Allocation Approach

Here's what we recommend to most NRIs in our community: don't choose exclusively.

A Balanced NRI Portfolio:

40-50% in NRE FDs or GIFT City USD FDs: Safe, guaranteed, for near-term needs and emergencies.

30-40% in GIFT City Equity Funds: Growth-oriented, for long-term wealth building.

10-20% in debt funds or liquid funds: Moderate returns with better liquidity than FDs.

This way, you get stability AND growth. You're protected against currency depreciation AND market crashes.

Example Allocation for $100,000:

$40,000 in GIFT City USD FDs (5-6% guaranteed, no currency risk). $35,000 in GIFT City equity funds (growth potential). $25,000 in NRE FDs (rupee exposure for future India expenses).

Adjust based on your timeline, goals, and risk tolerance.

👉 Tip: Use our NRI FD Comparison Tool to find the best rates across NRE, FCNR, and GIFT City FDs.

GIFT City FDs: The Third Option

We've compared NRE FDs with GIFT City mutual funds. But there's a third option many NRIs miss.

GIFT City Fixed Deposits combine elements of both:

Denominated in USD (like GIFT City MFs). Guaranteed returns (like NRE FDs). Currently offering 4.5-6% in USD (Source: IFSCA Banking Units). Tax-free in India.

For UAE NRIs who want safety without currency risk, GIFT City FDs are compelling.

The trade-off: Lower nominal rates than NRE FDs (5% in USD vs 7% in INR). But after adjusting for currency depreciation, effective returns are often similar or better.

Read our detailed comparison: GIFT City FDs vs Bank FDs.

Common Mistakes NRIs Make

Mistake 1: Chasing highest FD rates blindly

Small finance banks offer 7.5-8%. But are you comfortable with less-known names holding your ₹50 lakh?

Stick to banks you trust for large amounts. The extra 0.5% isn't worth sleepless nights.

Mistake 2: Ignoring currency risk entirely

"7% is better than 5%" sounds logical until you realize the rupee depreciated 4% that year. Net return: 3%.

Factor currency into your calculations, especially for money you'll repatriate.

Mistake 3: Putting everything in one instrument

100% in NRE FDs means zero growth. 100% in equity funds means high volatility.

Diversify based on when you need the money.

Mistake 4: Forgetting about home country taxes

UAE NRIs can ignore this. But UK NRIs must report all foreign income. US NRIs face FBAR and FATCA requirements.

Tax-free in India doesn't mean tax-free everywhere. Check our DTAA guide for your country.

Mistake 5: Not planning for return to India

If you'll become a resident Indian in 5 years, your investment strategy should reflect that. GIFT City funds may need to be redeemed. NRE accounts must be converted.

Plan ahead with our returning NRI checklist.

What If You're Planning to Return to India?

Your residential status change affects both options.

NRE FDs on return:

You can hold existing NRE FDs until maturity. No need to convert prematurely. After maturity, you can move funds to RFC (Resident Foreign Currency) account or regular resident account. Tax treatment changes: interest becomes taxable once you're a resident.

GIFT City Mutual Funds on return:

You can continue holding GIFT City investments even as a resident Indian (for most fund types). Tax treatment may change. Some GIFT City funds restrict investments to non-residents only. Check with the fund house before status change.

Our guide on RNOR to Resident transition covers the tax implications in detail.

The Bottom Line: Your Decision Framework

Ask yourself these questions:

1. When do I need this money?

Less than 3 years: NRE FD or GIFT City USD FD. 3-5 years: Mix of FDs and debt/hybrid funds. 5+ years: GIFT City equity funds can be considered.

2. Where will I spend this money?

In India: Rupee exposure (NRE FD) is fine. Outside India: Dollar exposure (GIFT City) protects purchasing power.

3. How much volatility can I handle?

None: NRE FD or GIFT City USD FD. Some: Debt/hybrid funds. Significant: Equity funds.

4. What's my tax situation?

UAE/Gulf: Both options are tax-free. Maximize based on other factors. US: PFIC complications make NRE FDs simpler for many. UK/Europe: Report all income; consider DTAA benefits.

5. How much am I investing?

Under $10,000: NRE FDs are simpler. $10,000-$75,000: Retail GIFT City funds are accessible. $75,000+: AIFs and diversified portfolios become options.

FAQs

Can I switch from NRE FD to GIFT City mutual funds mid-tenure?

Yes, but you'll pay premature withdrawal penalty on the FD (typically 0.5-1% lower interest). There's no direct transfer mechanism. You redeem the FD, convert to foreign currency, then invest in GIFT City. Factor in forex charges when calculating whether it's worth switching.

Which option is better for retirement planning?

For retirement, most NRIs need both stability and growth. A common approach: use NRE or GIFT City FDs for the portion you'll need in the first 5 years of retirement, and equity funds for longer-term needs. Our retirement corpus planning guide covers this in depth.

Do GIFT City mutual funds have SIP options?

Some GIFT City funds offer SIP (Systematic Investment Plan) options, though the ecosystem is less developed than mainland India. Minimum SIP amounts are typically higher ($100-500/month). AIFs don't offer SIPs. Check specific fund terms. For SIP-like discipline in GIFT City, some NRIs set up recurring transfers and invest manually each month.

What happens if a GIFT City fund house closes?

Your investments are held by a custodian, not the fund house directly. If the AMC shuts down, your units transfer to another fund house. You don't lose your money. IFSCA regulations mandate custodial arrangements for investor protection. This is different from an NRE FD where the bank itself holds your deposit (though DICGC insurance provides protection).

Is there a way to get guaranteed returns in GIFT City?

Yes. GIFT City USD FDs offer guaranteed returns (4.5-6%) in dollars. Some debt funds offer relatively stable returns (though not guaranteed). For pure capital protection with growth potential, structured products may be available through AIFs. Explore options through our GIFT City investment guide.

Making Your Decision

There's no universal "better" option. NRE FDs and GIFT City mutual funds serve different purposes.

If you value certainty and will spend in India, NRE FDs remain excellent.

If you want growth and currency protection, GIFT City funds offer a compelling alternative.

Most NRIs benefit from using both.

At Belong, we've built tools to help you compare: our FD comparison tool shows rates across NRE, FCNR, and GIFT City deposits. Our Mutual Funds Explorer helps you find suitable GIFT City funds.

Have questions about which option suits your specific situation? Join our WhatsApp community where NRIs discuss these decisions daily. Or download the Belong app to access our full suite of NRI financial tools.

Your money deserves the right home. Take the time to choose wisely.

Author: Ankur Choudhary, CEO & Co-founder, Belong IIT Kanpur alumnus | SEBI-registered Investment Advisor | 2x Fintech Founder

Published: December 2025

Sources:

• Reserve Bank of India - NRE Account Guidelines
• IFSCA Fund Management Regulations
• DICGC Deposit Insurance
• ICICI Bank NRI FD Rates
• BankBazaar NRE FD Comparison
• PolicyBazaar FD Rates