A friend in Dubai recently asked me: "Ankur, everyone keeps telling me to invest in mutual funds. But I still don't understand what I'm actually buying."
He's not alone.
We hear this question every week in our Belong WhatsApp community. The mutual fund industry in India has grown to over ₹80 lakh crore in assets.
The AUM of the Indian MF Industry has grown from ₹12.75 trillion in December 2015 to ₹80.23 trillion in December 2025, a more than 6 fold increase in a span of 10 years.
Yet many NRIs still wonder: what exactly am I putting my money into?
This article breaks down the mechanics. No jargon. No fluff.
Just a clear explanation of what mutual funds are, how they generate returns for you, and what you need to know as an NRI investor.
The Simplest Way to Understand a Mutual Fund
Think of a mutual fund as a shared investment pool. You and thousands of other investors contribute money.
A professional fund manager invests that combined pool into stocks, bonds, government securities, or a mix of these.
You don't buy individual stocks yourself. Instead, you buy "units" of the fund. Each unit represents your proportional ownership in the entire portfolio.
Here's a real example. Say a fund manages ₹100 crore and holds shares in 50 different companies.
If you invest ₹1 lakh, you own 0.001% of that entire diversified portfolio. Your returns depend on how those 50 companies perform collectively.
👉 Tip: For NRIs, mutual funds offer a practical way to invest in India from abroad without tracking individual stocks daily.
Who Manages Your Money?
Every mutual fund is run by an Asset Management Company, commonly called an AMC. The AMC appoints fund managers who make all investment decisions.
These fund managers are professionals with deep market expertise. They decide which stocks to buy, when to sell, and how to balance risk and return. You're essentially hiring an expert to manage your money.
In India, AMCs are regulated by SEBI (Securities and Exchange Board of India). SEBI mandates a trust-based structure, standard scheme categories, Risk-o-Meter disclosures, TER caps, fair valuation, NAV cut-offs, and regular portfolio and financial reporting.
This regulatory framework ensures transparency. Every month, AMCs must disclose their complete portfolio holdings. You can see exactly where your money is invested.
How Mutual Funds Actually Make Money for You
This is the part most articles skip. Let's get specific about the three ways mutual funds generate returns.
1. Capital Appreciation
When the stocks or bonds inside the fund increase in value, the fund's Net Asset Value (NAV) rises. If you bought units at NAV ₹100 and the NAV grows to ₹120, your investment has appreciated 20%.
2. Dividend Income
Some funds invest in companies that pay dividends. When these companies distribute profits, the fund receives that income. The fund may pass this to you or reinvest it.
3. Interest Income
Debt mutual funds invest in bonds and government securities that pay regular interest. This interest accumulates within the fund and increases its value.
👉 Tip: For NRIs seeking steady income, debt mutual funds can provide more predictable returns than equity funds, though with lower growth potential.
The Two Options: Growth vs IDCW
When you invest, you'll choose between two options.
Option | How It Works | Best For |
|---|---|---|
Growth | All gains stay invested and compound | Long-term wealth building |
IDCW (Income Distribution cum Capital Withdrawal) | Periodic payouts from the fund | Regular income needs |
Most NRIs building a corpus for returning to India prefer the growth option. Your returns keep compounding without interruption.
What Costs Are Involved?
Mutual funds charge an annual fee called the Total Expense Ratio (TER). This covers fund management, administration, and operational costs.
On December 17, 2025, SEBI approved the new Mutual Funds Regulations, 2026. These new rules separate the Base Expense Ratio from statutory levies like GST and STT, providing more clarity on what you're actually paying.
Current TER limits vary by fund type:
Fund Category | Maximum TER |
|---|---|
Index Funds & ETFs | 0.90% |
Active Equity Funds | 2.25% (varies by AUM) |
Debt Funds | 2.00% (varies by AUM) |
The TER is deducted from the fund's returns. If the fund earns 12% and the TER is 1.5%, your effective return is 10.5%.
👉 Tip: Compare the expense ratios of similar funds. Over 10-15 years, even a 0.5% difference compounds into lakhs.
Types of Mutual Funds You Should Know
SEBI has standardised mutual fund categories to help investors compare fairly. Here are the main types:
Equity Funds invest primarily in stocks. They carry higher risk but offer higher growth potential over long periods. Sub-categories include large-cap, mid-cap, small-cap, and flexi-cap funds.
Debt Funds invest in bonds and fixed-income securities. They offer more stability but lower returns. Options include liquid funds and corporate bond funds.
Hybrid Funds mix equity and debt. Balanced funds suit investors wanting moderate risk.
Index Funds simply replicate a market index like Nifty 50. They have lower costs since there's no active management involved. Compare index funds vs actively managed funds to decide what suits you.
Can NRIs Invest in Indian Mutual Funds?
Yes. But the process depends on your country of residence.
If you're in the UAE, you can invest in most Indian mutual funds through an NRE or NRO account. The process involves completing KYC, linking your bank account, and choosing your funds.
However, NRIs in the US and Canada face restrictions. Due to FATCA compliance requirements, many AMCs don't accept investments from these countries. Only a handful of fund houses like UTI, PPFAS, and a few others service US-based NRIs.
👉 Tip: Check out our guide on how NRIs can invest in mutual funds for the complete compliance checklist.
Tax Rules NRIs Must Know
Taxation is often where NRIs get confused. Here's the simplified structure.
Equity Mutual Funds: Short-term gains (held less than 12 months) are taxed at 20%. Long-term gains above ₹1.25 lakh per year are taxed at 12.5%.
Debt Mutual Funds: All gains are now taxed at your income tax slab rate, regardless of holding period. This changed in the 2023 budget.
Banks deduct TDS (Tax Deducted at Source) on NRI redemptions. The TDS rate is higher for NRIs compared to residents.
The good news? If you're a UAE resident, you can claim DTAA benefits to reduce your tax liability or claim refunds.
For detailed tax treatment, read our guide on mutual fund taxation for NRIs.
What Most Blogs Miss: Repatriation
Making money is one thing. Getting it back to the UAE is another.
If you invest through an NRE account, your principal and gains are fully repatriable. You can transfer profits back to your UAE bank account without RBI approval.
NRO account investments have annual repatriation limits of $1 million (after tax). You'll need to file Form 15CA/15CB for amounts above ₹5 lakh.
This is why choosing the right account structure matters before you invest. Our complete repatriation guide covers the exact process.
SIP vs Lump Sum: Which Works Better?
A Systematic Investment Plan (SIP) lets you invest a fixed amount monthly. By November 2025, SIP AUM had reached ₹16.53 trillion, accounting for more than 20% of the industry's total AUM, underscoring their critical role in long-term wealth creation.
SIPs work well for NRIs because they average out market volatility. You buy more units when prices are low and fewer when prices are high. Over time, this "rupee cost averaging" can improve your returns.
Lump sum works better when markets have corrected significantly and you have surplus funds to deploy.
Most NRIs we advise use a combination: regular SIPs plus occasional lump sum investments during market dips. Learn more about SIP vs lump sum investing.
👉 Tip: Start a SIP through an investment platform for NRIs that handles compliance automatically.
Common Mistakes NRIs Make
After advising hundreds of NRIs, we've seen patterns. Here are the most frequent errors:
Chasing past returns. Last year's top performer often underperforms next year. Focus on consistency over 5-10 years instead.
Ignoring expense ratios. A fund with 2.5% TER needs to beat its benchmark by 2.5% just to match a low-cost index fund.
Over-diversifying. Holding 15 funds doesn't mean better diversification. It often means overlapping holdings and confusion. 4-6 well-chosen funds usually suffice.
Forgetting tax implications. NRIs face higher TDS rates. Factor this into your expected returns.
Read our detailed breakdown of mutual fund investment mistakes to avoid costly errors.
Gift City: An Alternative Worth Knowing
If you want to invest in dollar-denominated funds without currency risk, GIFT City mutual funds offer an interesting option.
These funds operate in India's International Financial Services Centre. Returns are tax-free for NRIs, and you can invest directly in USD. Compare GIFT City mutual funds vs regular Indian mutual funds to understand the trade-offs.
Explore GIFT City options through our GIFT City mutual funds tool.
How to Get Started
Here's a simple roadmap:
- Complete your KYC through an NRI-friendly platform
- Link your NRE/NRO account
- Choose 3-5 funds based on your goals and risk tolerance
- Start SIPs or make lump sum investments
- Review performance quarterly, not daily
You can compare NRI FD rates if you want to balance mutual fund investments with safer fixed deposits. Also track market movements with our Gift Nifty tracker.
For those interested in alternative assets, explore GIFT City Alternative Investment Funds.
Key Takeaways
Mutual funds pool money from multiple investors to create professionally managed, diversified portfolios. They make money through capital appreciation, dividends, and interest income. NRIs can invest through NRE/NRO accounts, with specific tax and repatriation rules to follow.
The key is starting early, staying consistent, and understanding what you're investing in.
Many NRIs in our WhatsApp community started with questions just like yours. They now actively discuss fund selection, tax optimisation, and market timing. Join them for peer insights and expert guidance.
Looking for a simpler way to invest in India? The Belong app streamlines the entire process, from KYC to fund selection to tracking. Explore our mutual funds to get started.
