Active vs Passive GIFT City Mutual Funds for NRIs

If you've invested through a brokerage in Dubai, you probably own a Vanguard S\&P 500 ETF or an iShares index fund.

Low cost, passive, simple. The global consensus says passive wins over time.

Then you open the GIFT City mutual funds page. Every available fund is actively managed. No Nifty 50 index fund. No S\&P 500 tracker. No passive option at $500 minimum.

Does that mean GIFT City is stuck in the past? Or is there a reason the ecosystem launched with active funds first?

At Belong, we've watched this play out in real time. NRIs in our WhatsApp community who are devoted passive investors feel stuck.

NRIs who trust active managers wonder if GIFT City's tax-free structure makes active management even more powerful. Both groups have valid points.

This guide gives you the full picture. What's actually available today, what the global data says about active vs passive performance, why GIFT City changes the math, and what's coming next.

By the end, you'll know exactly how to position your GIFT City portfolio, whether you lean active, passive, or somewhere in between.

What's Actually Available in GIFT City Right Now

Let's start with reality rather than theory. As of early 2026, the GIFT City retail mutual fund landscape is dominated by actively managed products.

The Tata India Dynamic Equity Fund was the first retail inbound mutual fund from GIFT City, launched in September 2025 with a $500 minimum (Source: Business Standard). It's actively managed.

The fund dynamically allocates between 50-100% to broad-based equity funds and 0-50% to sectoral and thematic opportunities.

The DSP Global Equity Fund invests in global equities like Amazon and Meta. Actively managed. The fund manager selects individual stocks based on research and conviction.

The Edelweiss Greater China Equity Fund focuses on Chinese equities. Actively managed. The Sundaram India Mid Cap Fund targets Indian mid-cap stocks. Also actively managed.

What about passive options?

They exist, but not in the retail mutual fund space. Through NSE IFSC and India INX (the stock exchanges inside GIFT City), NRIs can trade ETFs including Unsponsored Depository Receipts of US stocks and some index-tracking products.

But these require a trading account, not a simple mutual fund investment.

The pipeline is promising. From April 2026, mutual funds and ETFs can relocate to GIFT City from offshore jurisdictions like Mauritius and Singapore without triggering capital gains tax (Source: Union Budget 2025). Industry sources indicate that Parag Parikh and other AMCs are planning both active and passive global fund launches in GIFT City.

👉 Tip: If you want pure passive index exposure through GIFT City today, your options are limited to exchange-traded products. For mutual fund investors starting at $500, the current choices are all actively managed. That may change significantly by late 2026. Track new fund launches on Belong.

Quick Refresher: Active vs Passive in Plain English

Before going further, let's define these terms without financial jargon.

Active management means a fund manager and research team pick specific stocks or bonds. They decide what to buy, when to buy, and when to sell. Their goal: beat the benchmark index. They charge more for this human expertise, typically 1.5-2.5% per year in expense ratios for domestic funds.

Passive management means the fund simply copies an index.

If the Nifty 50 has 50 stocks in specific proportions, a Nifty 50 index fund holds those same 50 stocks in those same proportions.

No human decision-making involved. The goal: match the index, not beat it. Costs are much lower, often 0.1-0.5% per year.

The debate has raged for decades. In the US, passive has convincingly won over long periods. In India, the picture is more nuanced. And in GIFT City, the equation shifts again because of the unique tax structure.

The right answer for an NRI in Dubai investing through GIFT City may be different from the right answer for someone investing in a Vanguard fund through an international brokerage. Context matters.

What Global Data Says: The SPIVA Scorecard

The most rigorous study on active vs passive is the SPIVA Scorecard, published by S\&P Dow Jones Indices since 2002.

It tracks how actively managed funds perform against their benchmarks across countries and time periods. Here's what it reveals.

Globally: Over 15-year periods ending December 2024, there were no categories in which a majority of active managers outperformed their benchmarks (Source: SPIVA Year-End 2024).

That's a staggering finding. Not a single category, across all countries, all asset classes.

In India (large-caps): The SPIVA India Mid-Year 2025 scorecard found that 66% of actively managed large-cap funds underperformed their benchmark (Source: SPIVA India Mid-Year 2025).

The Year-End 2024 scorecard was worse: 81.5% underperformance.

In India (mid and small-caps): This is where it gets interesting. Indian mid-cap and small-cap active managers have historically done better.

In H1 2025, the majority of mid-/small-cap active funds actually outperformed their benchmark.

The persistence problem: Even when active managers outperform in one period, they rarely repeat in the next.

S&P's Persistence Scorecards show that among top-quartile US large-cap funds in 2020, none remained top-quartile by 2022.

Skill is hard to distinguish from luck over short periods.

The takeaway: if you're investing in large-cap equities, passive has a strong statistical edge.

In smaller companies and less efficient markets, active management can still add value.

👉 Tip: India's stock market is less efficient than the US market. Information travels slower, analyst coverage is thinner, and regulatory changes create opportunities for skilled managers. This is why active management has a better track record in Indian mid and small-caps than in US large-caps. Keep this in mind when evaluating GIFT City funds that target Indian markets.

Why GIFT City Changes the Active vs Passive Math

Here's the part most active vs passive articles miss entirely. GIFT City's tax-free structure reshapes the cost equation that normally favors passive investing.

The core argument for passive funds is simple: lower costs lead to higher net returns.

If an active fund charges 2% and a passive fund charges 0.3%, the active manager must outperform by 1.7% just to break even. Over 20 years, that cost drag compounds into a massive gap.

In a regular Indian mutual fund, the math reinforces this. Active funds charge 1.5-2.5%. NRIs also face 12.5-20% TDS on capital gains, STT on transactions, and GST on management fees.

Every layer of cost tilts the odds toward passive.

GIFT City strips away most of those layers.

No TDS on redemption for non-residents. No STT. No GST on management fees. No capital gains tax in India under Section 10(4D) of the Income Tax Act. For UAE NRIs, no tax in the resident country either.

What does this mean practically?

A GIFT City active fund charging 2.5% in expense ratio has an effective cost advantage over a regular Indian active fund charging 2% once you factor in all the taxes the regular fund bears.

The GIFT City fund's higher headline fee is more than offset by zero tax leakage.

This doesn't mean active automatically wins in GIFT City. The fund manager still needs to generate alpha (returns above the benchmark).

But the hurdle rate is lower. An active GIFT City fund manager doesn't need to beat the index by 1.7% to justify their fees.

Even matching the index while saving 8-10% in taxes gives NRIs a better outcome than a taxed passive fund in mainland India.

The GIFT City active fund's effective cost is competitive with, and sometimes lower than, a regular Indian index fund when you include all tax layers.

👉 Tip: Don't compare GIFT City expense ratios to domestic fund expense ratios in isolation. Always compare after-tax, all-in costs. A GIFT City active fund at 2.5% with zero tax can deliver better net returns than a domestic index fund at 0.3% with 15-20% tax drag. Use Belong's fund comparison tools to see the full picture.

The Expense Ratio Trap NRIs Fall Into

This deserves its own section because it's the single most common mistake we see at Belong.

An NRI in Dubai sees a GIFT City fund with a 3% expense ratio and thinks: "That's outrageous. My Vanguard ETF charges 0.07%. Why would I pay 40 times more?"

On the surface, that logic seems airtight. But it ignores three critical factors.

Factor 1: Currency denomination.

Your Vanguard ETF gives you global equity exposure in USD. That's great. But it doesn't give you tax-efficient access to Indian equities.

If you want India exposure, your options are a regular Indian mutual fund (taxable) or a GIFT City fund (tax-free).

The Vanguard comparison is apples to oranges unless you don't want any India allocation.

Factor 2: Tax savings dwarf the fee difference.

On a $50,000 investment earning 12% annually, the 12.5% LTCG tax on a regular Indian fund costs you roughly $750 per year in tax drag. The 3% GIFT City expense ratio costs $1,500.

But the GIFT City fund pays zero tax. Net cost difference: $750 favoring the regular fund on expenses, but $750 going to the GIFT City fund on taxes.

It's roughly a wash, and that's before counting STT, GST, and the hassle of filing Indian tax returns for the regular fund.

Factor 3: Expense ratios will decline.

GIFT City is in its infancy for retail products. The first retail mutual fund launched only in September 2025.

Competition is minimal.

As more AMCs enter, expense ratios will compress. Early movers pay a premium, but the tax savings more than compensate.

The honest assessment: GIFT City expense ratios ARE high relative to mature markets. But comparing them to US ETF fees without adjusting for the tax-free structure is misleading.

👉 Tip: Compare total cost of ownership, not headline expense ratios. Total cost = expense ratio + taxes + currency conversion fees + transaction costs. GIFT City wins on everything except headline expense ratio. For a detailed breakdown, read our guide on choosing funds by expense ratio.

Where Active Funds Have the Edge in GIFT City

Active management isn't uniformly good or bad. Its value depends on the market, the strategy, and the fund manager.

In the current GIFT City landscape, active funds have specific advantages.

Indian mid and small-cap markets.

Unlike the heavily researched US large-cap space where beating the S&P 500 is nearly impossible, India's mid and small-cap segment has hundreds of under-analyzed companies.

A skilled active manager can find mispriced opportunities that a passive index can't exploit. The Sundaram India Mid Cap Fund targets exactly this space.

SPIVA data supports this. Indian mid-cap active managers have achieved majority outperformance in multiple measurement periods, unlike their large-cap counterparts.

Dynamic asset allocation.

The Tata India Dynamic Equity Fund doesn't just pick stocks. It dynamically shifts between broad-based equity (50-100%) and thematic/sectoral funds (0-50%).

This tactical flexibility is something a passive index fund simply cannot do. When markets look stretched, the manager can reduce equity exposure.

When opportunities emerge in specific sectors, they can increase allocation.

For NRIs who want a "set and forget" India allocation in their GIFT City portfolio, this active dynamic approach may actually be less stressful than a pure equity index that you'd need to rebalance manually.

Emerging markets and specialized geographies.

The Edelweiss Greater China Fund invests in Chinese equities, a market where government intervention, sudden regulatory changes, and information asymmetry create conditions where active managers can genuinely add value over passive indexing.

Global stock selection.

The DSP Global Equity Fund holds concentrated positions in companies like Amazon and Meta. In global markets, a concentrated active approach can outperform a broad index if the manager has genuine conviction and research depth.

The flip side: concentrated portfolios can also underperform badly if the manager's picks fail.

Where Passive Would Win (If Available)

Let's be fair to the passive camp.

There are clear scenarios where passive GIFT City funds would be superior.

Indian large-cap exposure.

If a Nifty 50 or Nifty 100 index fund were available in GIFT City with a 0.3-0.5% expense ratio, it would be a compelling option. SPIVA data shows that 66-81% of active Indian large-cap managers underperform their benchmark.

A passive fund tracking the Nifty 50 in USD would capture India's broad market growth at minimal cost with GIFT City's tax-free treatment.

This product doesn't exist in GIFT City's retail mutual fund space yet. But it likely will once the ecosystem matures and the April 2026 relocation rules bring more products.

US equity exposure.

For pure S&P 500 or global index exposure in USD, NRIs already have excellent passive options through international brokerages in the UAE.

They don't need GIFT City for this. An iShares or Vanguard global ETF at 0.07-0.20% expense ratio is hard to beat.

Where GIFT City adds value is India-specific or specialized exposure with tax advantages. Not as a replacement for your global passive allocation.

Core portfolio building.

If you believe in broad market returns and don't want to bet on a specific manager's skill, passive is inherently safer.

You won't beat the market, but you won't badly trail it either.

For NRIs building a long-term portfolio, a passive core with active satellite holdings is a well-established strategy.

👉 Tip: Don't abandon your existing passive global portfolio just because GIFT City is exciting. Use GIFT City for what it does uniquely well: tax-free access to Indian markets and specialized strategies. Keep your Vanguard/iShares holdings for broad global exposure. The two complement each other. Read our guide on building a diversified portfolio for more.

The Feeder Fund Reality

Here's a nuance most articles miss. Several GIFT City mutual funds are feeder funds. They don't invest directly in stocks.

Instead, they invest in their parent AMC's existing domestic mutual fund schemes.

The Tata India Dynamic Equity Fund invests in Tata AMC's Indian equity mutual funds and ETFs. It's essentially a USD-denominated wrapper around Tata's domestic funds.

Why does this matter for the active vs passive debate?

If the underlying domestic fund is actively managed (it is), then your GIFT City fund is actively managed by extension.

The GIFT City layer adds expense (the feeder fund has its own costs on top of the underlying fund's costs), but it also adds tax efficiency.

So you're paying two layers of fees: the underlying fund's expense ratio PLUS the GIFT City feeder's additional cost.

This "double layering" is a genuine concern. If the combined expense ratio hits 3-3.5%, the active manager needs to generate significant alpha to justify the cost.

But remember the tax offset. A combined 3.5% expense with zero tax can still beat a 1.5% domestic fund expense with 12.5-20% tax on gains, especially over longer periods where tax drag compounds.

As the GIFT City ecosystem matures, we expect to see more direct investment funds (not feeder structures) that eliminate this double-layering.

When that happens, active GIFT City funds will become even more competitive.

👉 Tip: When evaluating a GIFT City feeder fund, ask: what's the total expense ratio including the underlying fund? Not just the GIFT City layer. This total cost is what truly affects your returns. Compare GIFT City fund structures on Belong to understand the fee breakdown.

Active vs Passive: What Your Timeline Demands

Your investment horizon should influence where you land on the active vs passive spectrum.

Under 3 years: Neither active mutual funds nor passive ETFs are ideal. Short horizons amplify both market risk and the risk of picking a wrong active manager.

For this timeline, GIFT City USD fixed deposits offer guaranteed returns without any active/passive debate.

3 to 5 years: Active dynamic equity funds (like the Tata fund) have an edge here. Their ability to reduce equity exposure during volatile periods provides some downside protection that a pure passive index fund wouldn't offer.

A passive Nifty 50 fund held for only 3 years could easily show negative returns if you entered at a market peak.

5 to 10 years: This is where the active vs passive choice really matters. Over this period, compounding amplifies the impact of expense ratios AND tax savings.

Active funds need to consistently generate alpha to justify their higher costs. If you believe India's market will grow broadly (a macroeconomic bet), passive would be efficient.

If you believe specific sectors or companies will dramatically outperform the index, active is the way to access that conviction.

10+ years: Over decades, the SPIVA data overwhelmingly favors passive in large-cap markets. But GIFT City's tax-free compounding could extend the window where active management remains competitive.

A 2.5% expense ratio hurts less when you're compounding tax-free for 20 years versus paying 15-20% tax every time you rebalance in a regular fund.

The practical reality: with only active funds currently available in GIFT City's retail space, NRIs with any timeline are choosing between active GIFT City funds and passive funds outside GIFT City (losing the tax advantage).

👉 Tip: Don't wait for the "perfect" passive GIFT City fund if your timeline is 10+ years. Each year you delay costs you a year of tax-free compounding. Start with what's available, then rebalance toward passive if and when those options arrive. Explore current options on Belong.

The "Tracking Error" Problem GIFT City Doesn't Have Yet

One major criticism of passive funds globally is tracking error: the difference between the index fund's returns and the actual index returns. Causes include cash drag, transaction costs, and imperfect replication.

In India, the average Nifty 50 index fund has a tracking error of 0.05-0.2% annually. This is quite low and has improved dramatically over the past five years.

In GIFT City, if and when passive index funds launch, tracking error could be slightly higher initially.

The fund would need to manage USD-to-INR conversions for inbound funds, handle IFSCA regulatory requirements, and build operational infrastructure from scratch.

These are solvable problems, but they may create a small headwind for early passive GIFT City products.

Active GIFT City funds don't have this specific problem. They're not trying to replicate an index.

Their "error" is measured differently: as alpha (outperformance) or negative alpha (underperformance) relative to a benchmark.

This is a minor point, but worth noting. First-generation passive GIFT City products may not immediately deliver the ultra-tight tracking that investors expect from mature products like Vanguard or UTI Nifty 50 Index Fund.

Scenario-Based Recommendations

Instead of a blanket "active is better" or "passive is better," here's what we recommend at Belong based on your specific situation.

"I want India equity exposure through GIFT City and don't want to pick sectors."

Today: Tata India Dynamic Equity Fund (active, $500 minimum). Its dynamic allocation handles sector rotation for you. When passive Nifty 50 options launch, consider shifting 50-70% to passive and keeping 30-50% in the active fund for tactical flexibility.

"I want global diversification through GIFT City."

Today: DSP Global Equity Fund (active) for concentrated global equity. But honestly, for broad global passive exposure, your existing UAE brokerage probably offers better options (Vanguard VWRA, iShares SWDA). Use GIFT City for India-specific advantage, not for replicating what you can do cheaper elsewhere.

"I'm a passive investor and refuse to pay 2.5%+ expense ratios."

Keep your global passive portfolio through your UAE brokerage. Use GIFT City only for USD fixed deposits (guaranteed returns, zero active/passive debate) and GIFT City AIFs if you qualify ($75,000 minimum). Wait for passive index fund launches in GIFT City before allocating to equity mutual funds.

"I believe India's mid-cap story will outperform large-caps."

Sundaram India Mid Cap Fund (active) is built for this thesis. And the SPIVA data supports the idea that active mid-cap managers in India can add genuine value. This is one of the strongest cases for active management in GIFT City. Track how Indian markets move in real time using the GIFT Nifty tracker on Belong.

"I'm returning to India in 3-5 years and want tax-free compounding until then."

Any GIFT City active fund works. The tax-free window during your NRI and RNOR status is limited. Use it to compound actively in Indian equities, then transition to domestic passive funds after returning if that's your preference. The return-to-India playbook should include a GIFT City exit strategy.

The Blended Approach: Core-Satellite for GIFT City

The most sophisticated NRI investors don't pick one side. They combine active and passive based on where each adds value.

Core (60-70% of allocation): Broad market exposure. Today, this means the Tata Dynamic Equity Fund for India exposure, plus a passive global ETF from your UAE brokerage. When passive GIFT City index funds launch, shift the India core to passive GIFT City for tax efficiency.

Satellite (30-40% of allocation): Targeted, higher-conviction bets. Active GIFT City funds for mid-caps, Greater China, or global equity. These are areas where active management can genuinely add alpha.

This core-satellite model is used by institutional investors globally. It captures broad market returns cheaply (core) while allowing skilled managers to generate excess returns in specific niches (satellite).

For NRIs, the practical implementation looks like this:

👉 Tip: You don't have to choose one philosophy forever. Start with what GIFT City offers today (mostly active). Shift toward a blended core-satellite model as passive options become available. The key is staying invested rather than waiting for the perfect product.

What's Coming: The Passive Revolution in GIFT City

The current active-only landscape is temporary. Several developments will bring passive options to GIFT City.

April 2026 ETF relocation rule.

This Union Budget 2025 provision allows mutual funds and ETFs to relocate from offshore jurisdictions to GIFT City without triggering capital gains tax. This could bring established passive India ETFs from Mauritius and Singapore to GIFT City, giving NRIs access to familiar index-tracking products with GIFT City tax benefits.

AMC expansion.

Multiple AMCs, including Nippon India and Mirae Asset, are planning GIFT City launches. At least some of these are expected to include passive index fund options alongside active strategies. More competition means lower expense ratios for everyone.

IFSCA regulatory evolution.

The IFSCA Fund Management Regulations 2025 streamlined the fund launch process. Faster approvals mean quicker time-to-market for new products, including passive funds.

NRI demand. As more NRIs discover GIFT City through platforms like Belong, demand for low-cost passive options will grow. AMCs follow demand.

Our prediction: by mid-to-late 2026, NRIs will have at least 2-3 passive index fund options in GIFT City's retail space, alongside the growing active lineup. The ecosystem will look very different in 12 months.

The NRIs who start now with active funds will have the advantage of established accounts, completed KYC, and experience with the GIFT City system. When passive options arrive, switching will be straightforward.

The Behavioral Factor No One Talks About

Here's an uncomfortable truth from years of advising NRIs.

Active vs passive is a debate for investors who actually stay invested. The bigger wealth destroyer for NRIs isn't the wrong fund type. It's panic-selling during corrections, failing to start investing, or constantly switching between "the best" fund.

An NRI who consistently invests $500 per month in an "expensive" active GIFT City fund and holds for 15 years will almost certainly build more wealth than an NRI who waits three years for the perfect 0.1% passive fund and then panic-sells during the first 20% correction.

Behavioral consistency beats product optimization. Every time.

If active GIFT City funds give you the confidence to stay invested (because you trust the fund manager's ability to navigate downturns), that behavioral benefit can be worth more than the fee savings of a passive fund that keeps you up at night during market crashes.

Conversely, if you're the type who obsesses over expense ratios and would constantly second-guess an active manager's decisions, a passive fund (when available) would serve you better because you'd actually stick with it.

Know yourself. Then pick accordingly.

Active vs Passive for Different NRI Profiles

US-based NRIs: Most GIFT City mutual funds (both active and passive, whenever available) would be classified as PFICs under US tax law. Active or passive doesn't change the PFIC problem.

For US NRIs, the active vs passive choice is secondary to whether GIFT City funds make sense at all given the tax complexity. Consult a cross-border tax advisor first.

UAE/GCC NRIs: You're in the sweet spot. Zero income tax locally plus zero GIFT City tax means both active and passive options deliver full returns. Choose based on the strategy and cost, not tax considerations.

Active GIFT City funds are currently your best pathway to tax-free Indian market exposure.

UK NRIs: Your choice between active and passive in GIFT City should factor in UK reporting fund status.

If a fund doesn't qualify as a UK reporting fund, gains may be taxed as income (up to 45%) rather than capital gains (up to 20%). Check each fund's reporting status before investing.

NRIs planning to return to India: Active or passive matters less than timing. Use your NRI/RNOR window to maximize tax-free compounding in whichever GIFT City fund matches your risk profile.

After becoming a resident, reassess whether domestic passive funds offer better value.

Start With What Exists, Evolve With What Arrives

The active vs passive debate is real. The data is clear that passive wins in most large-cap markets over long periods.

India's mid and small-cap space is one of the global exceptions where active management still adds value.

GIFT City today offers only active retail mutual funds.

That's a limitation, but it's also a reflection of where active management makes sense: specialized strategies, dynamic allocation, and less efficient markets.

As the ecosystem grows, passive options will arrive to cover broad-market, low-cost exposure.

The smartest move for NRIs isn't picking a side in the debate.

It's using GIFT City's tax-free structure to compound wealth in whatever vehicle fits your goals, while the ecosystem matures around you.

The GIFT City IFSC now hosts over 200 fund management entities with committed capital exceeding $15 billion (Source: IFSCA Bulletin Q1 2025). Competition and product variety will only increase.

Many NRIs discuss active vs passive strategies daily in Belong's WhatsApp community.

If you're weighing specific funds or building a GIFT City allocation plan, that's where you'll find people who've already been through the same decision.

Ready to start? Download the Belong app to explore GIFT City mutual fund options, compare FD rates, and build your tax-efficient portfolio.

Disclaimer: Mutual fund investments are subject to market risks. Read all scheme-related documents carefully before investing. This article is for educational purposes and does not constitute personalized investment advice. Tax treatment depends on individual circumstances and jurisdiction. Consult a SEBI-registered advisor and qualified tax professional for advice specific to your situation. Past performance does not guarantee future results. SPIVA data cited is sourced from S\&P Dow Jones Indices and may not reflect future active/passive dynamics.