AIFs vs Mutual Funds - Which Is Right for NRIs

You've built wealth abroad. Now you want it to work harder in India.

But here's the dilemma: Do you go with mutual funds - familiar, liquid, easy - or take the leap into Alternative Investment Funds (AIFs) that promise higher returns but demand bigger commitments?

I've guided hundreds of NRIs through this exact choice. At Belong, we've seen what works and what doesn't. This isn't a generic comparison. 

This is the decision-making framework we share with our WhatsApp community members when they ask: "What's right for me?"

Let's break it down.

What This Decision Really Means

Choosing between AIFs and mutual funds isn't just about returns. It's about liquidity, tax efficiency, repatriation ease, and how much complexity you're willing to handle.

For NRIs, the stakes are higher. You're dealing with cross-border regulations, DTAA implications, currency conversion, and the ever-present worry about getting your money back out of India.

The right choice depends on three things: your investable corpus, your time horizon, and your appetite for illiquidity.

Quick Primer: What Are AIFs and Mutual Funds?

Alternative Investment Funds (AIFs) are privately pooled investment vehicles regulated by SEBI under the AIF Regulations, 2012. They invest in private equity, venture capital, real estate, hedge funds, and distressed assets. AIFs cater to high-net-worth individuals seeking exposure to alternative asset classes with potential for higher returns, though they come with higher risks and longer lock-in periods.

Mutual Funds pool money from multiple investors to invest in diversified portfolios of stocks, bonds, or other securities. They are regulated by SEBI and are suitable for investors seeking professional management with relatively lower risk. Mutual funds are accessible, liquid, and designed for retail investors.

👉 Tip: If you're new to investing in India, start with mutual funds. If you're already invested and looking for diversification beyond traditional assets, AIFs might be your next step.

Four Critical Differences That Matter

1. Minimum Investment

AIFs require a minimum investment of ₹1 crore, while mutual funds allow investments as low as ₹100-500.

But for most NRIs, you need serious capital to even enter the AIF space.

2. Liquidity and Lock-In

AIFs typically have lock-in periods ranging from 3 to 7 years, during which investors cannot withdraw their investments. Some closed-ended AIFs may have even longer tenures.

Mutual funds, on the other hand, offer high liquidity. You can redeem your units at any time, with proceeds usually hitting your account within 1 business day for equity funds.

Also Read - NRE vs NRO Account for Mutual Fund Investments

3. Asset Classes

AIFs give you access to alternative assets: startups, real estate projects, distressed debt, private equity deals that aren't available to the public.

Mutual funds invest primarily in publicly listed stocks and bonds. They're transparent, regulated, and easier to track.

4. Risk and Returns

AIFs typically offer higher return potential, especially Category III AIFs like hedge funds, as they are actively managed and focus on niche investment opportunities. But with higher potential returns come higher risks, complexity, and manager dependency.

Mutual funds offer moderate returns with lower risk, and the return potential depends on the fund category such as debt, equity, or hybrid. They're suitable for long-term wealth creation with proven track records.

Tax Treatment: Where NRIs Win or Lose

This is where things get interesting - and where most generic articles fail to give you the full picture.

Taxation on Mutual Funds

For NRIs, mutual fund gains are taxed as follows:

TDS is deducted at source. You can claim DTAA benefits if applicable, but you'll need a Tax Residency Certificate (TRC).

Learn more about taxation of mutual funds for NRIs.

Taxation on AIFs

Category I and Category II AIFs enjoy pass-through status, meaning income (other than business income) is exempt at the fund level and taxed in the hands of investors in proportion to their share.

Category III AIFs do not have pass-through status, so income is taxed at the fund level — at rates up to 30% plus surcharge (effective up to ~39% for non-residents).(Source)

For non-resident investors, withholding tax rates shall be either as provided under the Income Tax Act or DTAA, whichever is applicable.

But here's the game-changer most NRIs don't know about: GIFT City AIFs.

Also Read - How NRIs Can Avoid Double Taxation on Mutual Fund Gains

The GIFT City Advantage: Tax-Free Investing for NRIs

If you're an NRI looking at AIFs, GIFT City changes the entire equation.

All AIFs registered in GIFT City (Category 1, 2, and 3) benefit from tax exemptions at the fund level under Section 10(23FE) and 80LA, allowing investors to redeem without additional Indian capital gains tax in many cases.(source)

Even better: Category 3 AIFs investing in Indian equity mutual funds (not stocks directly) enjoy full exemption from capital gains tax in India, taxable only in the investor's country of residence, subject to DTAA

Other GIFT City benefits for NRIs include:

• No TDS on interest income from USD fixed deposits
• Zero STT, stamp duty, and GST on securities transactions
• No requirement to file ITR in India if you invest only through Category I/II AIFs in GIFT City
• Foreign currency denomination (USD) - no forced rupee conversion
• Easy repatriation under FEMA guidelines

Compare GIFT City FD rates with traditional NRE and NRO deposits using our comparison tool.

At Belong, we offer access to GIFT City AIFs and USD fixed deposits that let you invest in India without the tax headaches.

👉 Tip: Use our NRI Residential Status Calculator to understand your tax obligations before investing.

Who Should Choose AIFs?

You're a good fit for AIFs if:

• You have ₹1crore+ to invest and don't need liquidity for 5-7 years
• You're comfortable with higher risk for potentially higher returns
• You want exposure to private equity, venture capital, or real estate funds
• You have a strong understanding of alternative investments or access to expert advice
• You're investing through GIFT City and can leverage the tax benefits

Who Should Stick With Mutual Funds?

Mutual funds are better if:

• You want liquidity and the ability to redeem anytime
• You're starting with smaller amounts (₹10,000-₹10 lakh)
• You prefer transparency and daily NAV tracking
• You want proven, regulated, retail-friendly products
• You're building wealth systematically through SIPs

Learn about the best mutual funds for NRIs and how to invest in mutual funds from abroad.

Also Read - Comparing Indian Mutual Funds vs UAE Mutual Funds

The Bottom Line

There's no one-size-fits-all answer. The key distinction between Alternative Investment Funds and Mutual Funds lies in their accessibility and investment thresholds, with AIFs reserved for accredited investors while mutual funds are designed to be more accessible to the general public.

If you're an NRI with significant capital, a long time horizon, and access to GIFT City AIFs, the tax benefits alone can make a massive difference to your returns.

If you're building wealth gradually or need flexibility, mutual funds remain the smarter, safer choice.

At Belong, we help NRIs navigate both. Whether it's tax-free USD deposits in GIFT City, AIFs, or diversified mutual fund portfolios, we've built the tools and community to make investing in India simple.

Ready to explore GIFT City investments? Download the Belong app to compare rates, track your investments, and access expert guidance.

Have questions? Join 10,000+ NRIs in our WhatsApp community - ask anything about AIFs, mutual funds, tax planning, or compliance.

Sources:

1. SEBI AIF Regulations, 2012
2. Bajaj Finserv: AIF vs Mutual Funds
3. Dezerv: Alternative Investment Funds vs Mutual Funds
4. SBNRI: AIF Taxation
5. IIFL Capital: How Taxation Works for AIFs
6. GoINRI: How NRIs Can Invest in AIFs
7. Business Standard: NRIs Get Tax Exemption on GIFT City AIFs
8. Investmates: GIFT City Tax Benefits for NRIs