How to Compare Expense Ratios in GIFT City Funds

"The expense ratio is 2.8%. My Vanguard ETF charges 0.07%. Why would I ever pay that?"

We hear this almost every week in Belong's WhatsApp community. An NRI in Dubai compares a GIFT City fund's expense ratio to their existing international portfolio and walks away thinking GIFT City is overpriced.

That comparison is flawed. Not because 2.8% is cheap. It isn't. But because expense ratios in GIFT City mutual funds cannot be compared on headline numbers alone.

The tax structure, the fee layering, the currency denomination, and the absence of costs that other fund structures carry all change what you're actually paying.

This guide shows you how to compare GIFT City expense ratios the right way.

Not by staring at a single number, but by understanding the total cost of ownership, what's hidden inside that ratio, and when a "high" expense ratio still delivers more money in your pocket than a "low" one.

What an Expense Ratio Actually Covers

Before comparing numbers, you need to know what you're measuring.

An expense ratio is the annual fee a fund charges to manage your money. It's expressed as a percentage of your total investment. If you invest $10,000 in a fund with a 2.5% expense ratio, you're paying $250 per year in fees.

But that $250 isn't billed to you separately.

The fund deducts it daily from the NAV. So when a fund reports 12% returns, the expense ratio has already been subtracted. Your actual return is 12%, not 14.5% minus fees.

This is important because NRIs sometimes think they're paying expenses ON TOP of reported returns.

What's included inside that ratio varies.

In a typical GIFT City fund, the expense ratio covers the fund manager's salary and team costs, research and analysis, IFSCA regulatory compliance and reporting, custodian charges for holding assets, registrar and transfer agent fees, audit and legal costs, and marketing and distribution expenses.

What's NOT typically included: entry/exit loads (charged separately), transaction costs for buying and selling securities within the fund, and foreign exchange conversion costs if the fund invests across currencies.

👉 Tip: Always ask whether the stated expense ratio is all-inclusive or whether there are additional costs layered on top. Some GIFT City funds charge a "management fee" plus a separate "operating expense," which together form the total expense ratio. The fund's offer document will spell this out.

Why GIFT City Expense Ratios Look Higher Than Domestic Funds

Let's address the elephant in the room. GIFT City fund expense ratios typically range from 2% to 3.5%.

Domestic Indian active equity funds charge 1.5-2.5% (regular plans) or 0.5-1.5% (direct plans). Index funds charge 0.1-0.5%.

On the surface, GIFT City looks expensive. Three factors explain the gap.

Factor 1: New ecosystem, limited competition.

The first retail GIFT City mutual fund launched in September 2025 (Source: Business Standard). With only a handful of funds competing for NRI capital, there's no pricing pressure.

In domestic markets, hundreds of AMCs compete, driving costs down. As more AMCs launch GIFT City products through 2026, expense ratios will compress.

Factor 2: IFSCA regulatory overhead.

Operating under IFSCA requires separate compliance infrastructure, separate custodians, separate audit arrangements, and USD-denominated accounting.

These are real costs that domestic funds don't bear. The fund management entity (FME) structure mandated by IFSCA Fund Management Regulations 2025 requires dedicated resources that add to operational expenses.

Factor 3: Feeder fund layering.

Several GIFT City retail funds are feeder funds. They invest in their parent AMC's domestic schemes rather than directly in securities.

You pay the GIFT City wrapper's expense ratio PLUS the underlying domestic fund's expense ratio. This double layer is the single biggest driver of high headline expense ratios.

Understanding these reasons doesn't make the fees disappear. But it helps you evaluate whether the premium is justified by the benefits, specifically the tax-free structure that GIFT City provides.

The Number That Actually Matters: Total Cost of Ownership

Expense ratio is one number. Total Cost of Ownership (TCO) is the number that determines how much money stays in your pocket. TCO includes everything: fees, taxes, conversion costs, and compliance costs.

Let's compare TCO for a UAE NRI investing $50,000 in Indian equity with 12% gross returns.

Option A: Domestic direct-plan active fund

Expense ratio: 1% (direct plan).

GST on management fees: 18% of the 1% = 0.18%.

STT on equity transactions: approximately 0.05%. TDS on redemption (LTCG 12.5% above ₹1.25 lakh): roughly 1.2% of total returns annually.

Currency conversion cost (AED → INR → AED): 0.3-1% each way.

ITR filing cost for TDS refund: ₹3,000-10,000 annually.

Compliance time: 5-10 hours per year managing NRE/NRO accounts, tax filings, and documentation.

Estimated TCO: 2.5-4% annually.

Option B: GIFT City active fund

Expense ratio: 2.5-3% (all-inclusive).

GST: Nil. STT: Nil. TDS: Nil (Section 10(4D) exemption).

Currency conversion: Nil (invest and redeem in USD).

ITR filing: Not required for GIFT City income alone.

Compliance time: 1-2 hours per year.

Estimated TCO: 2.5-3% annually.

The "expensive" GIFT City fund has a LOWER total cost than the "cheap" domestic direct-plan fund once you account for taxes, conversion, and compliance.

👉 Tip: When comparing funds on Belong, look past the expense ratio column. Calculate TCO by adding tax drag and conversion costs for non-GIFT City alternatives. The fund with the lowest expense ratio often isn't the fund with the lowest total cost for NRIs. Our NRI FD comparison tool also shows all-in costs for fixed deposit alternatives.

Peeling Back the Feeder Fund Layer

This is the most misunderstood cost in GIFT City investing. Several retail GIFT City funds don't invest directly in stocks.

They invest in their parent AMC's domestic mutual fund schemes.

Take the Tata India Dynamic Equity Fund - GIFT IFSC.

It invests in Tata AMC's existing Indian equity mutual fund schemes and ETFs. That means you're paying two layers of expense:

Layer 1: The GIFT City fund's own expense ratio (covers the GIFT City wrapper, IFSCA compliance, FME operations, USD accounting).

Layer 2: The underlying domestic fund's expense ratio (covers stock selection, portfolio management, SEBI compliance).

The combined expense ratio is what you actually bear. If the GIFT City layer charges 1% and the underlying fund charges 1.2%, your total expense is approximately 2.2%.

Some fund houses disclose this clearly in their offer documents. Others show only the GIFT City layer's expense ratio, burying the underlying cost in footnotes.

How to check: read the Scheme Information Document (SID). Look for a section on "underlying investments" or "expenses of the underlying scheme."

If the GIFT City fund invests in domestic mutual fund schemes, both layers of fees should be disclosed.

Why this matters for comparison: If Fund A (GIFT City) charges 2.5% all-inclusive with a feeder structure, and Fund B (GIFT City) charges 2.8% but invests directly in securities without a feeder layer, Fund B might actually be cheaper.

The stated 2.5% on Fund A could be incomplete if it excludes the underlying fund's costs.

👉 Tip: Always ask: "Is this a feeder fund?" If yes, request the combined expense ratio. A GIFT City fund with a lower stated expense ratio but a feeder structure may cost more than a fund with a higher stated ratio that invests directly. Compare GIFT City fund structures on Belong to understand what you're actually paying.

Fixed vs Variable Components Inside the Expense Ratio

Not all parts of an expense ratio behave the same way. Understanding the composition helps you predict how costs might change over time.

Fixed components stay the same regardless of fund size: IFSCA licence fees, base audit costs, minimum custodian charges, base registrar fees.

These are split across all investors. The more people invest, the lower each person's share.

Variable components scale with fund size: fund manager compensation (often a percentage of AUM), trading commissions, compliance monitoring costs that grow with transaction volume.

In a young GIFT City fund with ₹100 crore AUM (roughly $12 million), fixed costs are spread across a small base.

The same fund at ₹1,000 crore AUM would spread those fixed costs across 10x more investors, reducing the per-person expense ratio by 15-25%.

This is why early-stage GIFT City funds have higher expense ratios than mature domestic funds. It's partly a scale issue, not just a greed issue.

Practical implication: if you invest in a GIFT City fund early, you'll pay a premium. But as the fund grows and more NRIs join, your expense ratio should decline over the next 2-3 years.

SEBI mandates expense ratio slabs for domestic funds based on AUM size. IFSCA may introduce similar slab-based caps as the ecosystem matures.

How to Compare GIFT City Funds Against Each Other

Comparing GIFT City to domestic funds is one exercise. Comparing GIFT City funds to each other is another. Here's a framework.

Step 1: Ensure you're comparing the same category.

An India equity fund's expense ratio can't be compared to a global equity fund.

Global funds have higher research costs (covering multiple markets), higher custodian fees (multi-jurisdiction asset holding), and higher compliance costs (cross-border regulations).

Expect global equity GIFT City funds to charge 0.3-0.5% more than India-focused GIFT City funds.

The DSP Global Equity Fund (global stocks) will naturally have a different cost structure than the Tata India Dynamic Equity Fund (Indian equities). Comparing their expense ratios directly would be misleading.

Step 2: Check if both are feeder funds or direct investment vehicles.

As explained above, feeder funds have hidden layers. Two funds with identical stated expense ratios can have very different total costs depending on their structure.

Step 3: Compare expense ratios after adjusting for performance fees.

Some GIFT City AIFs and select funds charge performance fees (also called carried interest or incentive fees).

This is typically 15-20% of returns above a hurdle rate (say, 8%). If a fund earns 18% and the hurdle is 8%, the performance fee applies to the 10% excess.

Performance fees don't appear in the base expense ratio. They're deducted from your NAV when triggered.

A fund showing a 2% expense ratio plus a 15% performance fee above 8% hurdle is significantly more expensive in a good year than a fund showing a flat 3% expense ratio with no performance fee.

Step 4: Factor in exit loads.

Exit loads are penalties for redeeming before a specified period, typically 1% if redeemed within 12 months.

This isn't part of the expense ratio but affects your total cost, especially if you're investing for a shorter period.

👉 Tip: Request the fund's Key Information Memorandum (KIM) or Scheme Information Document (SID). These documents disclose ALL costs including performance fees, exit loads, and underlying fund expenses. If the documents aren't readily available, ask through Belong's platform and we'll help you find them.

The Tax Savings Offset: Calculating Your Breakeven

This is the single most important calculation for NRIs deciding between GIFT City and domestic funds. At what expense ratio does GIFT City stop being worth it?

Let's work through a specific example.

Ravi (name changed), a 38-year-old NRI in Dubai, invests $25,000 in Indian equity for 10 years.

Scenario 1: Domestic direct-plan index fund

Expense ratio: 0.3%. Gross return: 12%.

Net return after expense ratio: 11.7%.

TDS on LTCG: 12.5% on gains above ₹1.25 lakh. Currency conversion: 0.5% each way (entry + exit = 1%).

After-tax, after-conversion return: approximately 10.0%.

Value after 10 years: approximately $64,844.

Scenario 2: GIFT City active fund

Expense ratio: 2.8%. Gross return: 12%.

Net return after expense ratio: 9.2%. TDS: Nil.

Currency conversion: Nil (USD in, USD out). Tax: Nil (UAE resident). After-tax return: 9.2%.

Value after 10 years: approximately $60,510.

In this scenario, the domestic index fund wins by about $4,334.

But notice: the active GIFT City fund would need to generate only 0.8% of alpha (outperformance above its benchmark) to close the gap entirely.

Now change the expense ratio. What if the GIFT City fund charged 2.0% instead of 2.8%?

Net return: 10.0%. Value after 10 years: $67,275.

That beats the domestic fund by $2,431.

The breakeven expense ratio for a UAE NRI choosing between a GIFT City fund and a taxed domestic fund is roughly 2.2-2.5%, assuming both earn the same gross returns.

Below that expense ratio, GIFT City wins clearly.

Above it, the active manager needs to generate alpha to justify the premium.

This table is your cheat sheet. If a GIFT City fund's expense ratio is below 2.2%, it's almost certainly better than a taxed domestic fund.

Above 3%, the fund manager needs to deliver meaningful alpha for the GIFT City route to win.

👉 Tip: Your breakeven changes based on your resident country's tax rate. UAE NRIs (0% tax) have a higher breakeven tolerance than UK NRIs (20-45% tax) who would benefit even more from GIFT City's tax-free structure. A UK NRI's breakeven expense ratio for GIFT City could be as high as 3.5-4% because their domestic tax drag is much higher.

Expense Ratios in GIFT City AIFs: A Different Beast

Everything discussed so far applies to GIFT City mutual funds. AIFs (Alternative Investment Funds) have a completely different fee structure that deserves separate treatment.

GIFT City AIFs typically charge a "2 and 20" model borrowed from global hedge funds: 2% management fee PLUS 20% performance fee above a hurdle rate.

Some newer AIFs have reduced this to "1.5 and 15" or even "1 and 10."

For an AIF earning 20% returns with a 2/20 structure and an 8% hurdle:

Management fee: 2% of $150,000 = $3,000 per year.

Performance fee: 20% of returns above 8% hurdle = 20% of ($150,000 x 12%) = $3,600.

Total fee in year one: $6,600, which is effectively 4.4% of the invested amount.

In a bad year where the AIF returns only 6% (below the hurdle), total fee is just the 2% management fee = $3,000 (2% of $150,000).

This asymmetry is important.

In good years, AIFs are significantly more expensive than mutual funds. In poor years, they're roughly comparable.

Over a full market cycle, the blended expense is typically 3-4%.

Is this worth it? For strategies that mutual funds can't replicate (long-short equity, private credit, structured products), the AIF expense structure may be justified by genuinely differentiated returns.

For strategies that simply mirror what a mutual fund does, the extra cost is hard to justify.

👉 Tip: If you're evaluating GIFT City AIFs ($75,000+ minimum), focus on the net-of-fee return, not the gross return. A 25% gross return with 4.4% effective fees gives you 20.6% net. A mutual fund earning 15% gross with 2.5% fees gives you 12.5% net. The AIF wins on net returns despite higher fees. But a mutual fund earning 13% with 2.5% fees (10.5% net) loses to an AIF only if the AIF consistently delivers its target.

How Expense Ratios Evolve Over Time

GIFT City expense ratios today are not what they'll be in 3 years. Here's how we expect costs to move.

2026-2027: Moderate decline.

As more AMCs launch retail schemes (driven by the April 2026 ETF relocation rules from Union Budget 2025), competition will create some pricing pressure.

Expect 0.3-0.5% reductions in average expense ratios.

2027-2028: Meaningful compression.

With 10-15+ retail fund options competing for NRI capital, expense ratios should approach 1.5-2.5% for active funds.

Passive index funds (expected by then) will likely start at 0.3-0.8%, higher than domestic equivalents but much lower than current active-only options.

2028+: Maturity pricing.

As the GIFT City ecosystem matures with over $50 billion in AUM, expense ratios should stabilize at levels competitive with Singapore and Dublin fund domiciles: 0.2-0.5% for passive, 1.0-2.0% for active.

This trajectory matters for your investment decision today.

If you invest now at 2.8% and the ratio drops to 2.0% in two years, you've effectively paid a premium only for the first two years.

Over a 10-year horizon, that early premium is diluted.

The NRIs who'll benefit most are those who enter early, establish their accounts and KYC, and automatically benefit from lower fees as competition increases.

The NRIs who wait for "perfect" pricing lose years of tax-free compounding.

Direct vs Regular: Does It Apply in GIFT City?

In domestic Indian mutual funds, choosing between direct and regular plans is crucial.

The difference is 0.5-1% annually in expense ratios, compounding into lakhs over 20 years.

Does GIFT City have this distinction? Currently, the retail GIFT City fund landscape is too new for this to be a major factor.

Most funds are distributed through platforms and banks, with the distribution cost embedded in the expense ratio.

However, as the ecosystem matures, expect AMCs to offer both options. When that happens, the same logic applies: direct plans (without distributor commission) will be cheaper by 0.5-1%.

For now, compare across fund houses rather than worrying about direct vs regular within GIFT City.

The more meaningful cost differences are between AMCs and between fund structures (feeder vs direct investment).

👉 Tip: If you're investing through Belong, ask which plan variant is available. As the ecosystem grows, we'll offer access to the most cost-efficient plan options available. Track how to choose the right investment platform for NRI-specific considerations.

The Hidden Cost Most NRIs Ignore: Compliance and Time

Here's a cost that never appears in any expense ratio comparison. It's your time.

Managing a domestic Indian mutual fund as an NRI involves: maintaining active NRE/NRO accounts with minimum balances, completing periodic KYC updates, filing Indian income tax returns to claim TDS refunds, tracking DTAA documentation (Tax Residency Certificate, Form 10F), monitoring FEMA compliance for repatriation, and converting currencies at unfavorable bank rates.

Conservative estimate: 10-15 hours per year. If you value your time at $50/hour (modest for a UAE professional), that's $500-750 in "hidden" annual cost. On a $50,000 portfolio, that's an additional 1-1.5% drag.

GIFT City eliminates most of this. USD in, USD out.

No currency conversion. No ITR filing solely for GIFT City income.

No DTAA documentation. No NRE/NRO maintenance for investment purposes.

When you add this time cost to the TCO calculation, GIFT City's higher headline expense ratio becomes even more competitive.

👉 Tip: Track how much time you spend managing your Indian investments annually. Many NRIs in our community discovered they were spending 20+ hours per year on compliance, tax filing, and bank coordination. That hidden cost often exceeds the expense ratio difference between GIFT City and domestic funds.

Expense Ratio Red Flags in GIFT City Funds

Not every high expense ratio is justified. Watch for these warning signs.

Red Flag 1: Expense ratio above 3.5% for a simple equity strategy.

A fund that invests in Nifty 50 stocks or broad-market Indian equities shouldn't charge 3.5%+. That premium is justifiable only for complex strategies (multi-asset, long-short, specialized geographic focus).

Red Flag 2: No performance fee disclosure.

If an AIF or managed fund earns 20%+ but doesn't clearly state whether a performance fee applies, you may be paying far more than the stated expense ratio suggests.

Red Flag 3: Expense ratio hasn't declined despite growing AUM.

As a fund attracts more capital, fixed costs should be spread across more investors, reducing the per-person expense ratio.

If a fund's AUM has tripled but the expense ratio hasn't budged, that's a sign the AMC is capturing all the scale benefits instead of passing them to investors.

Red Flag 4: Significantly higher than category average.

Once 5-10 comparable GIFT City funds exist in a category, you'll have a benchmark. A fund charging 30-50% more than the average without clear justification (better track record, unique strategy, lower underlying costs) deserves scrutiny.

Red Flag 5: Hidden transaction costs.

Some funds exclude brokerage commissions and settlement charges from the expense ratio, reporting them separately.

These can add 0.2-0.5% annually. Look for "total operating expenses" or "total expense ratio inclusive of all charges" in the fund documents.

A Worked Comparison: Four GIFT City Funds Side by Side

Let's apply everything to the actual funds available through Belong.

When comparing these four funds, you cannot simply rank them by expense ratio. The Tata and Sundaram funds (feeder structures) include an additional layer that the DSP and Edelweiss funds (direct investment) don't. A fair comparison requires looking at total expense after all layers.

The DSP Global Equity fund invests across multiple countries, which increases custody and compliance costs. Its higher expenses relative to an India-only fund reflect genuine operational complexity, not inefficiency.

The Edelweiss China fund targets a single volatile market where active research provides the biggest edge. Its expense ratio should be evaluated against the alpha it generates in a market where passive indexing carries significant risk of government intervention.

👉 Tip: Don't rank GIFT City funds by expense ratio alone. Rank them by net-of-fee, after-tax return relative to their respective benchmarks. A 3% expense fund that beats its benchmark by 4% net gives you more than a 2% expense fund that trails its benchmark by 1%. Explore all funds on Belong and compare them with their proper benchmarks using our GIFT Nifty tracker for Indian market context.

Expense Ratios and the Return-to-India Question

Your expense ratio tolerance should shift based on how long you'll remain an NRI.

If you're planning to return to India in 3-5 years, GIFT City's tax-free window is limited. Every dollar saved on expenses matters more because you have fewer years to compound. A 0.5% expense ratio difference over 4 years on $50,000 is roughly $1,000. Worth optimizing for, but not worth obsessing over.

If you're staying abroad for 10-20+ years, the compounding effect of expense ratios is enormous. On $50,000 at 12% gross returns, the difference between 2% and 3% expense ratios over 20 years is approximately $27,000. That's more than half your original investment lost to fees.

The sweet spot: choose the lowest TCO fund that matches your strategy for the first 3-5 years. As fees decline and more options launch, reassess and switch if better alternatives emerge during your RNOR transition period or later.

What Most Blogs Get Wrong About GIFT City Fees

Myth 1: "GIFT City funds are expensive."

Half-truth. Headline expense ratios are higher than domestic direct plans. But TCO (including taxes, conversion, compliance) is often lower.

The claim is incomplete without context.

Myth 2: "You should always pick the cheapest fund."

Dangerous oversimplification. In a tax-free environment like GIFT City, the fund that generates the best net returns wins, not the one with the lowest headline fee.

A fund charging 2.5% that returns 15% gives you 12.5%. A fund charging 1.5% that returns 11% gives you 9.5%. Expense ratio didn't determine the winner.

Myth 3: "Expense ratios will never come down."

Wrong. Every new market goes through a high-cost early phase.

The Indian domestic mutual fund industry in 2005 had average expense ratios of 2.5-3%. Today, direct-plan index funds charge under 0.2%. GIFT City will follow a similar trajectory.

Myth 4: "High expense ratio = bad fund management."

Not always. Complex strategies (dynamic allocation, multi-geography, alternative assets) genuinely cost more to run.

A multi-asset fund investing across Indian equity, global bonds, and commodities will have higher operational costs than a simple large-cap Indian equity fund.

Myth 5: "NRIs should avoid GIFT City until fees drop."

Worst advice possible for UAE NRIs. Each year you wait is a year of tax-free compounding lost. Even at today's higher expense ratios, the tax savings make GIFT City competitive.

The investment mistakes NRIs regret most are missed opportunities, not slightly higher fees.

Your 5-Step Expense Ratio Comparison Checklist

Use this every time you evaluate a GIFT City fund.

Step 1: Get the full picture.

Find the total expense ratio including all layers. If it's a feeder fund, add the underlying fund's expense ratio.

Step 2: Compare within category.

Only compare India equity to India equity, global equity to global equity, mid-cap to mid-cap.

Step 3: Calculate TCO, not just expense ratio.

Add taxes (for domestic alternatives), currency conversion costs, compliance costs, and your time cost.

Step 4: Check for performance fees.

If the fund charges performance fees above a hurdle, estimate the total cost in a good year (15%+ returns) and a bad year (under 8% returns).

Step 5: Evaluate net-of-all-cost returns.

The fund with the highest net return (after expenses, after taxes, after conversion) is the best choice. Not the fund with the lowest headline expense ratio.

Focus on What Stays in Your Pocket

Expense ratios matter. Paying 3% when you could pay 1.5% for an identical product is wasteful. But GIFT City funds aren't identical to domestic funds. They offer tax-free compounding, USD denomination, zero TDS, and simplified compliance.

The right question isn't "which fund has the lowest expense ratio?" It's "which fund leaves the most money in my pocket after all costs, all taxes, and all conversions?"

For most UAE-based NRIs, GIFT City funds answer that question favorably despite their higher headline fees. For UK NRIs saving 20-45% in taxes, the math is even clearer. For US NRIs facing PFIC complications, the equation is different entirely.

GIFT City now hosts over 200 fund management entities with committed capital exceeding $15 billion (Source: IFSCA Bulletin Q1 2025). As the ecosystem grows, costs will fall, options will multiply, and NRIs who entered early will benefit from improved terms on top of years of tax-free compounding.

Many NRIs discuss fee structures, compare fund costs, and share real experiences daily in Belong's WhatsApp community. If you're evaluating specific funds, that's the place to get practical, unfiltered feedback.

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

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. Expense ratios cited are indicative and based on available information as of early 2026. Actual fund expenses may vary. Past performance does not guarantee future results.