How Should NRIs Select Equity Mutual Funds in India

"I've shortlisted five funds. They all look good. How do I pick one?"

This question comes up almost daily in our NRI community. And honestly, it's the right question to ask. With over 500 equity schemes in India, selection paralysis is real.

At Belong, we've helped hundreds of NRIs build portfolios that match their goals, risk appetite, and time horizon. This guide shares the exact framework we use. By the end, you'll know not just what to look for, but how to eliminate 90% of options quickly and confidently.

The 7-Step Selection Framework

Before we get into fund types and jargon, here's the practical sequence we recommend:

1. Define your goal and timeline
2. Decide your risk comfort level
3. Pick the right fund category
4. Filter by expense ratio
5. Check risk-adjusted metrics (not just returns)
6. Evaluate fund manager consistency
7. Confirm NRI eligibility and tax impact

Let's work through each step.

Step 1: What Are You Investing For?

Every fund serves a different purpose. Without clarity on your goal, you'll end up chasing returns or copying someone else's portfolio.

Common NRI goals:

If your goal is under 5 years away, equity funds may not be appropriate. Market volatility can hurt short-term returns. Consider debt funds or hybrid funds instead.

👉 Tip: Write down your specific goal and target date. "I want ₹1 crore for my daughter's education in 2035" is better than "I want to grow my money."

Step 2: How Much Volatility Can You Handle?

Be honest here. Many investors overestimate their risk tolerance during bull markets, then panic-sell during corrections.

A simple test: If your ₹10 lakh investment dropped to ₹7 lakh in three months, would you:

• A) Buy more at lower prices
• B) Hold and wait patiently
• C) Lose sleep and consider exiting

If you answered C, stick to large-cap or balanced funds. If A, you can consider mid and small-caps.

Risk levels by fund category:

Your risk appetite should also factor in your overall financial situation. If you have a stable job abroad and emergency funds in place, you can take more equity risk. If your income is variable or you're close to retirement, be conservative.

Step 3: Understanding Fund Categories

SEBI has defined clear categories so investors can compare apples to apples. Here's what each means:

Large-Cap Funds Invest at least 80% in the top 100 companies by market value. Think Reliance, TCS, HDFC Bank. These are stable, established businesses. Lower growth potential but also lower volatility. Good for conservative investors or shorter timeframes (5-7 years).

Mid-Cap Funds Invest at least 65% in companies ranked 101-250 by market value. These are growing businesses with potential to become large-caps. Higher volatility but also higher growth potential. Suitable for 7+ year horizons.

Small-Cap Funds Invest at least 65% in companies ranked 251 and below. These are emerging businesses. Highest volatility and highest return potential. Only for investors with 10+ year horizons and strong risk appetite.

Flexi-Cap Funds No restrictions on market-cap allocation. Fund manager decides based on market conditions. Can move between large, mid, and small-caps. Good all-weather option for most investors.

Multi-Cap Funds Must invest at least 25% each in large, mid, and small-caps. Forced diversification across market segments. More volatile than flexi-cap due to mandatory small-cap exposure.

Value Funds Focus on stocks trading below their intrinsic worth. These are fundamentally strong companies that are temporarily undervalued. Require patience as value plays can take years to materialize.

Sectoral/Thematic Funds Concentrate on specific sectors (banking, IT, pharma) or themes (manufacturing, ESG). High risk due to lack of diversification. Only for investors who understand the sector well.

For most NRIs, we recommend starting with flexi-cap or large-cap funds. They offer a balance of growth and stability without requiring constant monitoring.

For detailed analysis of specific categories, see our guides on thematic mutual funds and small-cap funds.

Step 4: Filter by Expense Ratio

Expense ratio is the annual fee charged by the fund to manage your money. It's deducted from returns, so a lower expense ratio means more money in your pocket.

Why it matters: A 1% difference in expense ratio might seem small. But over 20 years on a ₹10 lakh investment growing at 12%, that 1% costs you approximately ₹6 lakhs. (Source: ICICI Direct)

Expense ratio benchmarks:

Always choose Direct Plans over Regular Plans. Direct plans have no distributor commission built in, saving you 0.5-1% annually. Over a decade, this compounds significantly.

👉 Tip: A fund with 1% expense ratio needs to beat its benchmark by at least 1% just to match index fund returns. Most active funds fail to do this consistently.

Step 5: Look Beyond Returns (Risk Metrics That Matter)

Here's where most investors go wrong. They sort funds by 3-year or 5-year returns and pick the top performers. Past returns don't guarantee future performance.

Instead, evaluate risk-adjusted returns using these metrics:

Sharpe Ratio Measures return earned per unit of total risk. Higher is better.

• Above 1: Good
• Above 2: Very good
• Above 3: Excellent

Formula: (Fund Return - Risk-Free Rate) / Standard Deviation

A fund earning 15% with high volatility might have a lower Sharpe ratio than one earning 12% with low volatility. The second fund is actually more efficient.

Alpha Measures how much the fund outperformed its benchmark after adjusting for risk. Positive alpha means the fund manager added value beyond what the market gave.

Example: If a fund returned 14% and its benchmark returned 12%, with a beta of 1, the alpha is approximately 2%. That's fund manager skill, not just market movement.

Beta Measures how the fund moves relative to the market.

• Beta = 1: Moves with the market
• Beta > 1: More volatile than market
• Beta < 1: Less volatile than market

If you want stability, look for beta below 1. If you want aggressive growth, beta above 1 is acceptable.

Standard Deviation Measures how much returns deviate from the average. Lower standard deviation means more predictable returns.

A fund with 12% average returns and 15% standard deviation could swing anywhere from -3% to +27% in any given year. That's a wide range.

Where to find these metrics: Value Research, Morningstar India, or AMC fact sheets.

👉 Tip: Compare Sharpe ratios of funds within the same category. A large-cap fund's Sharpe ratio shouldn't be compared with a small-cap fund's.

Step 6: Fund Manager Consistency

Numbers don't tell the whole story. The person making investment decisions matters too.

What to check:

Tenure: Has the fund manager been running this fund for at least 3-5 years? If the impressive returns were under a different manager, they're less relevant.

Track record across cycles: Did the fund perform reasonably during market corrections (2020 COVID crash, 2022 correction)? A fund that falls less during downturns often recovers faster.

Other funds managed: How have the manager's other schemes performed? Consistent performance across multiple funds suggests skill, not luck.

Investment style: Does the manager's style (growth vs value, concentrated vs diversified) match your expectations?

You can find fund manager information in the scheme's monthly factsheet or on Value Research.

Step 7: NRI Eligibility and Tax Impact

Not all funds accept NRI investments. And tax treatment differs from resident Indians.

Eligibility check: Most equity funds accept NRIs from UAE, UK, Singapore, and Gulf countries. However, US and Canada NRIs face FATCA restrictions. Many AMCs don't accept investments from these countries.

AMCs that accept US/Canada NRIs (with additional documentation):

• SBI Mutual Fund
• UTI Mutual Fund
• Aditya Birla Sun Life
• L\&T Mutual Fund

Always verify with the specific fund house before investing.

Tax treatment for NRIs (FY 2024-25 onwards):

(Source: Zerodha Fund House)

TDS is deducted at source when you redeem. You can claim DTAA benefits to avoid double taxation in your country of residence.

For detailed tax calculations, see our NRI mutual fund taxation guide.

SIP vs Lump Sum: Which Works Better?

SIP (Systematic Investment Plan) invests a fixed amount monthly. It averages out your purchase price over time, reducing the impact of market volatility.

Lump sum invests everything at once. If markets are low, you benefit from the entire upswing. If markets are high, you risk buying at the peak.

Our recommendation for NRIs:

Use SIP for regular investment from salary. It builds discipline and removes timing decisions.

Use lump sum for windfalls (bonus, property sale) but consider splitting into 3-6 monthly installments if markets seem elevated.

For a deeper comparison, see our SIP vs lump sum guide.

👉 Tip: SIPs starting at ₹500 are possible. Don't wait to accumulate a large sum before starting.

Common Mistakes NRIs Make

After working with hundreds of NRI investors, we've seen these patterns repeatedly:

Chasing last year's top performer The fund that topped the charts last year often underperforms the next. Markets are cyclical. What worked in a bull run may struggle in consolidation.

Ignoring expense ratios A 1.5% difference compounded over 15 years is massive. Always compare expense ratios before finalizing.

Too many funds Five funds doing similar things doesn't mean diversification. It means duplication. Most investors need 3-5 funds across different categories.

Not rebalancing Your equity allocation should match your risk profile. If equity grows to 80% of your portfolio when you wanted 60%, rebalance periodically.

Forgetting currency risk Your investment is in INR. When you repatriate to USD or AED, currency movements affect your actual returns. A 12% fund return with 3% rupee depreciation gives you only 9% in dollar terms.

Track rupee movements using our Rupee vs Dollar tracker.

Skipping tax planning Selling everything in one financial year can push gains above the ₹1.25 lakh LTCG exemption threshold. Spreading redemptions across years can reduce tax.

How to Get Started

Step 1: Open an NRI bank account You need an NRE (repatriable) or NRO (non-repatriable) account. Most NRIs prefer NRE for flexibility. Understand the NRE vs NRO difference before choosing.

Step 2: Complete KYC Submit PAN card, passport, overseas address proof, and FATCA declaration. Many platforms offer video KYC for overseas investors. See our NRI KYC guide for details.

Step 3: Select your funds Use the framework above. Start with 2-3 funds across different categories.

Step 4: Start your SIP or invest lump sum Link your NRI bank account and set up auto-debit for SIPs.

Step 5: Review annually Check fund performance against benchmarks and peers once a year. Don't tinker monthly.

The GIFT City Alternative

Here's something most equity fund articles won't tell you.

GIFT City mutual funds offer NRIs zero capital gains tax. These are USD-denominated funds operating in India's IFSCA-regulated zone.

You get Indian market exposure without the 12.5-20% tax hit. For NRIs investing significant amounts, the tax savings alone justify exploring this option.

Through Belong, you can access GIFT City equity funds with:

• No capital gains tax
• No need for NRE/NRO account
• USD denomination protecting against rupee depreciation
• Start with just $500

Explore options like DSP Global Equity Fund or Tata India Dynamic Equity Fund.

Our Final Recommendation

For most NRIs starting their equity journey, here's a simple allocation:

Conservative (lower risk):

• 60% Large-cap or Nifty 50 Index Fund
• 40% Flexi-cap Fund

Moderate (balanced risk):

• 40% Flexi-cap Fund
• 30% Large & Mid-cap Fund
• 30% Mid-cap Fund

Aggressive (higher risk, 10+ year horizon):

• 30% Flexi-cap Fund
• 30% Mid-cap Fund
• 20% Small-cap Fund
• 20% International Fund

Adjust based on your specific goals, timeline, and comfort with volatility.

For personalized guidance, explore our best funds for NRIs page or use the Mutual Funds Explorer.

Have questions about fund selection? Join our WhatsApp community where NRIs discuss strategies, share research, and help each other: Join Here

Ready to start investing? Download the Belong app: Download Belong

Sources: SEBI, Value Research, Morningstar, Zerodha Fund House, ICICI Direct