You've heard the term "mutual funds" a hundred times. Perhaps your cousin in Bangalore keeps suggesting them. Or you saw an ad promising 15% returns while scrolling through Instagram.
But here's what nobody explains properly: How do mutual funds actually work? And more specifically, how do they work for you as an NRI earning in dirhams and living thousands of miles away from India?
At Belong, we've helped hundreds of UAE-based NRIs navigate these exact questions. And the confusion usually boils down to three things: not understanding the basics, not knowing the tax implications, and not realising there are better alternatives available today through GIFT City.
This guide covers everything from what a mutual fund actually does with your money to the specific TDS rates that will be deducted when you redeem. No jargon left unexplained. No regulatory detail skipped.
What Is a Mutual Fund? The Simple Explanation
A mutual fund is a pool of money collected from thousands of investors and managed by a professional fund manager. Instead of you picking individual stocks or bonds, the fund manager does it for you.
Think of it like a group investment where everyone chips in money. A professional then invests that pooled money across dozens or hundreds of companies. Your share of the profits (or losses) depends on how much you invested.
When you invest in a mutual fund, you buy "units" of that fund. The value of each unit is called NAV (Net Asset Value). It changes daily based on how the underlying investments perform.
👉 Tip: Mutual funds are regulated by SEBI (Securities and Exchange Board of India), providing strong investor protection compared to unregulated investment schemes.
How Your Money Gets Invested
When you put ₹10,000 into a mutual fund, here's what happens:
Step 1: Your money goes into a pooled account with money from thousands of other investors.
Step 2: The fund manager uses this pool to buy securities. For an equity fund, this means buying shares of various companies. For a debt fund, this means bonds and government securities.
Step 3: You receive "units" based on the current NAV. If the NAV is ₹50 and you invest ₹10,000, you get 200 units.
Step 4: As the underlying investments grow or decline in value, your NAV changes. When you sell your units, you get the current NAV minus any exit load or taxes.
The fund manager charges a fee for this service, called the expense ratio. This typically ranges from 0.5% to 2.5% annually, depending on whether you choose a direct plan or regular plan.
Understanding NAV: The Price Tag of Your Investment
NAV (Net Asset Value) is calculated using a simple formula:
NAV = (Total Assets - Total Liabilities) ÷ Number of Outstanding Units
For example, if a mutual fund owns investments worth ₹100 crore, has liabilities of ₹2 crore, and has issued 10 crore units, the NAV would be ₹9.80 per unit.
Every mutual fund calculates its NAV at the end of each trading day. When you invest, you get units at that day's NAV. When you redeem, you get paid based on that day's NAV.
Important clarification: A higher NAV doesn't mean a fund is expensive or performing better. A fund with NAV of ₹500 and one with NAV of ₹50 could have identical returns. NAV is just a pricing mechanism, not a performance indicator.
👉 Tip: Don't avoid a fund because its NAV seems "high." Instead, look at historical returns over 3, 5, and 10 years compared to its benchmark index.
Types of Mutual Funds NRIs Can Invest In
Equity Mutual Funds
These invest primarily in stocks (at least 65% of the portfolio). They offer higher return potential but come with higher volatility.
Categories include:
Large-Cap Funds: Invest in India's top 100 companies by market capitalisation. Lower risk within equity.
Mid-Cap Funds: Invest in companies ranked 101-250. Higher growth potential but more volatility.
Small-Cap Funds: Invest in companies beyond the top 250. High risk, high potential return.
Flexi-Cap Funds: Fund manager can invest across market caps based on opportunities.
Index Funds: Passively track indices like Nifty 50 or Sensex. Lowest expense ratios.
ELSS (Tax-Saving Funds): Equity funds with a 3-year lock-in that qualify for Section 80C deductions.
Debt Mutual Funds
These invest in fixed-income securities like government bonds, corporate bonds, and money market instruments. Lower returns but more stable.
Categories include:
Liquid Funds: Invest in securities maturing within 91 days. Ideal for parking surplus cash.
Short-Duration Funds: Investment horizon of 1-3 years.
Corporate Bond Funds: Invest primarily in high-rated corporate bonds.
Gilt Funds: Invest exclusively in government securities. Zero credit risk.
Hybrid Funds
These combine equity and debt in varying proportions, offering a balance between growth and stability.
Multi-Asset Allocation Funds: Invest across equity, debt, gold, and other asset classes.
Balanced Advantage Funds: Dynamically shift between equity and debt based on market conditions.
Aggressive Hybrid Funds: Maintain 65-80% in equity for equity taxation benefits.
👉 Tip: For long-term goals (7+ years), equity funds typically outperform. For goals under 3 years, stick to debt or liquid funds.
Can NRIs Invest in Indian Mutual Funds?
Yes. NRIs are fully permitted to invest in Indian mutual funds under FEMA regulations. The investment must be:
- Made in Indian rupees (not foreign currency directly)
- Routed through an NRE or NRO account
- Compliant with KYC and FATCA requirements
The specific account you use determines how you can repatriate your money later.
One restriction: NRIs from the USA and Canada face additional FATCA compliance requirements. Due to these complexities, only 8 fund houses currently accept investments from US/Canada-based NRIs: SBI, UTI, L\&T, Sundaram, PPFAS, ICICI Prudential, Tata, and Birla Sun Life.
For NRIs in the UAE or other non-FATCA countries, virtually all Indian mutual fund houses are accessible.
Which Account to Use: NRE or NRO?
Your choice of account has significant implications for repatriation and taxation.
Feature | NRE Account | NRO Account |
|---|---|---|
Source of Funds | Foreign earnings | Indian income (rent, dividends) |
Repatriation | Fully repatriable | Limited to $1 million/year |
Tax-free in India | Taxable at 30% TDS | |
MF Investment | Foreign income | Indian income |
MF Redemption Credit | To NRE account | To NRO account |
If your goal is to invest foreign earnings and eventually take the money back abroad, use your NRE account.
The mutual fund redemption proceeds will be credited to the same type of account you invested from. So NRE investments are fully repatriable; NRO investments follow repatriation limits.
👉 Tip: Many NRIs make the mistake of investing rental income (NRO) when they should be using their salary savings (NRE). Plan this based on when and how you'll need the money.
How to Complete KYC as an NRI
Before investing in any mutual fund, you must complete KYC (Know Your Customer) verification. Here's what you'll need:
Documents Required:
- Valid passport (self-attested copy)
- Overseas address proof (utility bill, bank statement, or residence permit)
- PAN card (mandatory for all mutual fund investments)
- Visa/OCI card/PIO card
- Recent passport-sized photograph
- FATCA declaration
The KYC Process:
Step 1: Submit documents to any KRA (KYC Registration Agency) like CAMS or CDSL. Many platforms now offer video KYC, eliminating the need for physical verification.
Step 2: Complete In-Person Verification (IPV). This can now be done via video call with the fund house or distributor.
Step 3: Once KYC is completed with one KRA, it's valid across all fund houses. You don't need to repeat it for each investment.
The entire process typically takes 3-5 working days when done online.
👉 Tip: If you're visiting India, complete your KYC for mutual funds in person. It's faster and eliminates documentation hassles.
SIP vs Lumpsum: Which Is Better for NRIs?
What Is a SIP?
A Systematic Investment Plan (SIP) allows you to invest a fixed amount at regular intervals (usually monthly). Instead of timing the market with one large investment, you spread your investment over time.
How SIP Works:
- You set up an auto-debit from your NRE/NRO account
- Every month, a fixed amount is invested
- You buy more units when markets are low, fewer when markets are high
- This "rupee cost averaging" reduces timing risk
Minimum SIP amounts start from ₹500-₹1,000 per month with most fund houses.
When Lumpsum Makes Sense
If you have a large sum (perhaps from end-of-service gratuity or property sale) and markets have recently corrected, a lumpsum investment might make sense.
However, for most NRIs building wealth over time, SIP is the smarter approach.
Factor | SIP | Lumpsum |
|---|---|---|
Market Timing Risk | Lower | Higher |
Discipline | Built-in | Requires self-control |
Rupee Cost Averaging | Yes | No |
Best For | Regular income | Windfall amounts |
Minimum Investment | ₹500/month | Usually ₹5,000+ |
👉 Tip: If you receive annual bonuses, consider investing them as lumpsum into debt funds, then setting up an STP (Systematic Transfer Plan) into equity funds over 6-12 months.
Taxation of Mutual Funds for NRIs (2025 Rates)
Taxation is where most NRIs get confused. The rules changed significantly after the Union Budget 2024, so here's the updated position.
Equity Fund Taxation
Holding Period | Tax Type | Tax Rate |
|---|---|---|
Up to 12 months | STCG (Short-Term Capital Gains) | 20% |
Over 12 months | LTCG (Long-Term Capital Gains) | 12.5% on gains above ₹1.25 lakh |
The ₹1.25 lakh exemption is per financial year across all equity investments (not per fund).
Debt Fund Taxation
For debt funds purchased after April 1, 2023, there's no distinction between short-term and long-term. All gains are taxed at your income tax slab rate, which can be up to 30% for NRIs.
No indexation benefit is available for these funds anymore.
TDS Rates for NRIs
This is critical: AMCs deduct TDS at source before crediting redemption proceeds to your account.
Fund Type | STCG TDS | LTCG TDS |
|---|---|---|
Equity Funds | 20% | 12.5% |
Debt Funds | 30% | 30% |
Dividend Income | 20% | - |
The TDS rates are before surcharge and 4% health & education cess. Actual deduction could be higher based on the amount.
If your actual tax liability is lower than TDS deducted, you can file an ITR and claim a refund.
👉 Tip: Submit Form 15CB and 15CA when repatriating large amounts. This ensures proper tax documentation and prevents issues later.
How DTAA Protects You from Double Taxation
India has Double Taxation Avoidance Agreements (DTAA) with over 88 countries, including the UAE.
Here's how it works for UAE-based NRIs:
Scenario: You redeem equity mutual funds with ₹5 lakh capital gains.
Tax in India: ₹62,500 (12.5% LTCG after ₹1.25 lakh exemption)
Tax in UAE: Zero (no personal income tax)
Net Effect: You pay tax only in India.
For NRIs in countries with income tax (like the UK or USA), you can claim foreign tax credit in your resident country for taxes paid in India. This prevents paying tax twice on the same income.
To claim DTAA benefits, you'll need:
- Tax Residency Certificate (TRC) from your country of residence
- Form 10F submitted to Indian authorities
👉 Tip: UAE has no personal income tax, making DTAA benefits straightforward. Your only tax obligation is to India at the rates mentioned above.
Direct Plans vs Regular Plans: The Hidden Cost Difference
When you invest in a mutual fund, you'll see two options:
Direct Plan: Bought directly from the AMC. No distributor commission. Lower expense ratio.
Regular Plan: Bought through an advisor or distributor. Higher expense ratio (includes distributor commission).
The difference typically ranges from 0.5% to 1% annually.
This might seem small, but over 20 years, this compounds significantly:
Example: ₹10,000 monthly SIP for 20 years at 12% vs 11% (1% difference)
- Direct Plan (12%): ₹99.9 lakh
- Regular Plan (11%): ₹86.1 lakh
- Difference: ₹13.8 lakh
For NRIs managing investments remotely, direct plans make financial sense if you can manage without advisor hand-holding.
👉 Tip: Use Belong's Mutual Funds Explorer to compare funds and make informed decisions without paying distributor commissions.
What Is Expense Ratio and Exit Load?
Expense Ratio
This is the annual fee charged by the fund house to manage your money. It includes:
- Fund manager's salary
- Administrative costs
- Custodian fees
- Marketing expenses
Typical ranges:
- Index funds: 0.1% - 0.5%
- Actively managed equity funds: 0.5% - 2.5%
- Debt funds: 0.2% - 1.5%
The expense ratio is deducted from the fund's returns daily, so you don't pay it separately. A fund showing 12% returns has already accounted for the expense ratio.
Exit Load
This is a fee charged when you redeem before a specified period. It discourages short-term trading.
Common structures:
- Equity funds: 1% if redeemed within 12 months
- ELSS: No exit load (but 3-year lock-in)
- Liquid funds: No exit load after 7 days
Always check exit load before investing, especially if you might need the money sooner.
The GIFT City Alternative: Tax-Free Mutual Funds for NRIs
Here's what most NRIs don't know: You can invest in GIFT City mutual funds and potentially pay zero capital gains tax in India.
What Are GIFT City Mutual Funds?
These are mutual funds launched by Indian AMCs within Gujarat International Finance Tec-City (GIFT City), India's first International Financial Services Centre (IFSC).
Key Benefits:
- No TDS: No tax deducted at source on redemptions
- Tax-free for UAE NRIs: Capital gains not taxable in India when invested through Category-3 AIFs; taxable only in your country of residence
- USD Denominated: Invest and receive returns in dollars, eliminating rupee depreciation risk
- Full Repatriation: No restrictions on taking money abroad
- No Indian tax filing: If your only India income is from GIFT City investments
Available Options
Tata India Dynamic Equity Fund launched in GIFT City with just $500 minimum investment, making it accessible beyond high-net-worth individuals.
Other AMCs like DSP are also launching GIFT City variants.
For larger investments, GIFT City AIFs (Alternative Investment Funds) offer similar benefits with minimum investments of $75,000-$150,000.
👉 Tip: For UAE-based NRIs, GIFT City investments can be completely tax-free. Compare this to 12.5%-30% tax on regular mutual funds. The math speaks for itself.
Common Mistakes NRIs Make with Mutual Funds
Mistake 1: Not Updating NRI Status
If you became an NRI after starting SIPs as a resident, you must inform the AMC and update your KYC status. Failing to do this creates compliance issues.
Mistake 2: Using the Wrong Account
Investing from NRO when you should use NRE (or vice versa) creates repatriation complications later.
Mistake 3: Ignoring Tax Implications
Many NRIs focus only on returns and forget that 30% TDS on debt funds significantly reduces actual gains.
Mistake 4: Chasing Past Returns
A fund that returned 25% last year might not repeat that. Look at 5-year and 10-year track records, not just recent performance.
Mistake 5: Not Considering Currency Risk
Your returns are in rupees. If the rupee depreciates 5% against the dirham while your fund grows 10%, your real return is only 5% in dirham terms.
Mistake 6: Overlooking Exit Load Timing
Redeeming an equity fund at 11 months incurs 1% exit load. Waiting one more month saves that entire amount.
👉 Tip: Use Belong's Compliance Compass to check if you're following all necessary rules across banking, investments, and taxation.
Step-by-Step: How to Start Investing in Mutual Funds from UAE
Step 1: Determine Your Residential Status
Use Belong's Residential Status Calculator to confirm your NRI status for the current financial year.
Step 2: Open an NRE/NRO Account
If you don't have one, open an NRI account with a bank that offers good digital services and competitive FD rates. HDFC, ICICI, and SBI have branches in the UAE.
Step 3: Complete KYC
Submit documents to a KRA or complete video KYC through your chosen investment platform.
Step 4: Choose Your Investment Route
Option A: Direct with AMC websites (lowest cost, self-directed)
Option B: Through a distributor or advisor (hand-holding available, higher cost)
Option C: GIFT City mutual funds through Belong (tax-efficient, USD-denominated)
Step 5: Select Funds Based on Goals
- Retirement (10+ years): Flexi-cap or large-cap equity funds
- Child's education (5-7 years): Balanced advantage or hybrid funds
- Emergency fund: Liquid or ultra-short duration funds
Step 6: Set Up SIP or Invest Lumpsum
Register for auto-debit from your NRE/NRO account. Most platforms offer SIPs starting from ₹500.
Step 7: Monitor and Rebalance Annually
Review your portfolio once a year. Rebalance if any asset class drifts more than 10% from your target allocation.
Comparing Mutual Funds vs Other NRI Investment Options
Investment | Returns | Liquidity | Tax Efficiency | Currency Risk |
|---|---|---|---|---|
Equity Mutual Funds | 10-15% | High | Moderate (12.5-20%) | Yes |
Debt Mutual Funds | 6-8% | High | Low (30% TDS) | Yes |
6-7% | Medium | High (Tax-free) | Yes | |
4-5% USD | Medium | High (Tax-free) | No | |
GIFT City Mutual Funds | 8-12% USD | Medium | Very High | No |
Variable | Low | Low | Yes |
For NRIs prioritizing tax efficiency and currency stability, GIFT City options deserve serious consideration over traditional mutual funds.
Key Takeaways
- Mutual funds pool money from investors and are managed by professionals
- NRIs can invest using NRE (fully repatriable) or NRO (limited repatriation) accounts
- Equity fund LTCG is taxed at 12.5% above ₹1.25 lakh; debt funds at slab rates up to 30%
- TDS is deducted at source; claim refund through ITR if excess
- DTAA prevents double taxation for NRIs in treaty countries like UAE
- Direct plans save 0.5-1% annually compared to regular plans
- GIFT City mutual funds offer tax-free investing for UAE-based NRIs
What Should You Do Next?
If you're a UAE-based NRI looking to invest in mutual funds, here's our honest advice:
For equity exposure with tax efficiency: Consider GIFT City mutual funds where your capital gains can be tax-free.
For debt/fixed income: Compare NRE FDs (tax-free interest) vs GIFT City USD FDs (tax-free + no currency risk).
For comprehensive planning: Download the Belong app to compare options, or join our WhatsApp community where thousands of NRIs discuss investment strategies daily.
Making smart financial decisions doesn't require complexity. It requires clarity. And that's exactly what we're here to provide.
Sources:
- SEBI Mutual Fund Regulations: https://www.sebi.gov.in/
- Income Tax Department, Government of India: https://incometaxindia.gov.in/
- RBI Master Direction on FEMA: https://www.rbi.org.in/
- AMFI (Association of Mutual Funds in India): https://www.amfiindia.com/
- IFSCA Regulations: https://ifsca.gov.in/
Disclaimer: Mutual fund investments are subject to market risks. Read all scheme-related documents carefully before investing. Past performance is not indicative of future returns. The information provided here is for educational purposes and should not be considered personalised investment advice. Consult a qualified financial advisor for decisions specific to your situation.
