Retail mutual funds shunned Gift City. That’s starting to change

DSP Mutual Fund has already launched its first retail scheme from the international financial centre. Now, subsidiaries of PPFAS Mutual Fund and NJ Mutual Fund have applied to launch retail-focused schemes in GIFT City, said three people in the know.

“For NJ, the fund management entity (FME) as well as the fund have been approved by the regulator,” said one of the people quoted earlier, speaking on the condition of anonymity. While the FME is approved for PPFAS, it still hasn’t filed to launch a fund with the regulator, the person added.

In GIFT City, an FME is a fund manager and a retail scheme is similar to a mutual fund plan.The International Financial Services Centres Authority (IFSCA) is the regulator for GIFT City.

Queries emailed to PPFAS and NJ Mutual Fund remained unanswered until press time.

Tax clarity

Gift City allows financial services to non-residents and residents, including institutions and retail investors, in foreign currency. So far, most funds launched there have been non-retail products such as Category III Alternative Investment Funds. This category, which includes hedge funds and long-only funds, has 166 schemes in GIFT City.

The total commitments raised by these AIFs as of June 2025 stood at a little over $10 billion, according to IFSCA’s quarterly bulletin. But only two of these funds allow retail investments, and even these have yet to raise money.

However, tax clarity provided in the Union Budget last year, a developing ecosystem for registrars and transfer agents (RTAs), and other structural improvements have started drawing more asset management companies to consider retail schemes in GIFT City.

Similar to Category III AIFs, a fund will pay tax of 42% on capital gains if investors redeem within two years, and 12.5% after two years. The fund also pays tax on every churn it makes within the portfolio.

Mutual funds in India attract a 12.5% long-term capital gains tax, and funds pay no tax on selling a stock.

“After the clarification on taxation related to retail schemes, AMCs started launching retail funds as they didn’t want to launch a fund where there was no clarity in terms of taxes,” said Jay Kothari, senior vice-president, equities at DSP Mutual Fund.

Global RTAs present in GIFT City were handling not more than 100-200 clients in a fund as the maximum investor count for non-retail funds is capped to 1,000 per fund. “Now RTAs like KFin andCAMS have started building capabilities in GIFT City to handle the load of retail funds, which typically have a much larger investor base,” said Abhinav Sharma, head of international business at Tata Asset Management.

According to experts, the outbound retail schemes in GIFT City, where Indians invest in global equities, will take off more than inbound investments from overseas in a GIFT City fund.

“Inbound retail schemes could face challenges because most funds lack the requisite licences to market funds to retail foreign investors, and regulators in those countries are strict about protecting small investors who may not fully understand the risks,” said Vaibhav Shah, head of business strategy, products and international business at Mirae Asset Investment Managers.

The outbound retail schemes, on the other hand, are more straightforward and expected to see more demand since they target Indian investors, for whom most AMCs already have licences from the Securities and Exchange Board of India (Sebi) or the IFSCA.

Compliance, cost hurdles

Still, gaps remain, such as the absence of digital KYC and omnibus structures, and a higher cost for investors.

Currently, an investor, before onboarding to a fund, has to print the form, sign it, get the know-your-customer (KYC) documents notarized or certified by a chartered accountantand then courier it to GIFT City.

“This is a cumbersome process. What we need is digital onboarding—video KYC, e-signatures—just like other jurisdictions globally,” said Sharma of Tata Asset Management. “The regulator has understood this, and discussions are on. Once this is allowed, it will be a big step forward for retail participation.”

In many global jurisdictions, omnibus structures are allowed, where one large account represents thousands of investors. In GIFT City, however, every investor must open their own account and complete KYC individually. “This makes scaling retail funds very difficult, as the end investor is supposed to be known,” said an executive from an asset management company, who also spoke on the condition of anonymity.

To send money to a foreign jurisdiction, including GIFT City, Indians need to use the Liberalised Remittance Scheme (LRS) window. Under this, the Reserve Bank of India allows all resident individuals, including minors, to freely remit up to $250,000 per financial year for investments and other requirements such as education, medical treatment and travel.

However, every time an investor sends money through this route, the bank charges a transaction fee.

Investors will have to incur a minimum of $50-$100 while transferring money via LRS, including bank transfer charges and a forex conversion fee, which can be a significant cost for small-ticket retail applications, said Shah.

According to Kothari of DSP Mutual Fund, “Since banks charge conversion and transaction fees based on the amount, smaller transactions tend to attract relatively higher costs.”