Passive vs Active Funds for NRIs in India: The Post-TER Alpha Maths, the SEBI TRI Rule, and Why the Hands-Off Case Wins From Abroad

A reader in Toronto sent me his India portfolio last month: eleven actively managed equity funds, accumulated over nine years through a relationship manager at a bank back home, every one of them a large-cap or "flexi-cap" fund charging between 1.6% and 2.1% a year. He wanted to know which two or three to keep. The honest answer was that for the large-cap core he was paying roughly Rs 2 lakh a year in fees to do, on average, slightly worse than a Nifty 50 index fund he could have bought for one-tenth the cost. He had been sold the comfort of a manager at a moment when, for that slice of his money, the manager was the most expensive thing in the room. This guide is about when an active fund is worth its fee for an NRI and when it is quietly costing you a flat in a tier-two city, and about how to build a portfolio you can actually run from abroad.

The 30-second answer: For the large-cap core of an NRI's India equity, lean passive: SPIVA India data shows the majority of large-cap active funds trail their benchmark after fees over a decade, and a low-cost Nifty 50 or Nifty 500 index fund runs 0.10% to 0.30% all-in versus 1.5% to 2.1% for active. The fee gap compounded over 20 years is the corpus, not a rounding error. Where active still pays is mid and small-cap, where the average fund has historically beaten its index. Both passive and active equity funds are taxed identically: 12.5% long-term above Rs 1.25 lakh, 20% short-term, with TDS at redemption. The SEBI TRI rule since 1 February 2018 raised the benchmark bar and exposed how thin active large-cap alpha really is. Run a core-satellite split: passive core, active satellites only where they earn the fee. US and Canada NRIs face the PFIC regime on either, which changes the answer entirely.

This guide assumes you already know how an NRI buys Indian mutual funds and the NRE-versus-NRO distinction; if not, start with the mutual fund eligibility guide. What follows is the part that decides real returns: where the active-versus-passive debate actually stands in India after the benchmark rules tightened, why expense ratio is a far bigger lever than it looks across a 20-year horizon, why the tax treatment gives you no reason to prefer one over the other, why a passive core suits an absentee owner specifically, and how to combine the two in a core-satellite structure that respects both the maths and your inability to babysit a portfolio from another continent.

The active-versus-passive debate, as it actually stands in India

The global version of this debate is settled to the point of tedium: across most developed markets, the majority of active funds fail to beat their index after fees over any horizon long enough to matter, and you cannot reliably identify the minority that will outperform in advance. India was, for a long time, treated as the exception. The argument went that Indian markets were "less efficient", that good managers could still find mispriced stocks the way they no longer could in the heavily researched US large-cap space, and that paying 2% for active management was therefore worth it. There was genuine truth in this a decade or two ago. The question is whether it still holds, and the data has been steadily eroding the claim, especially at the large-cap end.

The cleanest evidence comes from the SPIVA India scorecard, the half-yearly study by S&P Dow Jones Indices that measures what share of active funds beat their benchmark. The headline numbers have moved decisively against active large-cap managers. In the calendar year 2024, around 81% of Indian large-cap active funds failed to beat the S&P BSE 100. Over the ten years ending mid-2025, roughly 73% of large-cap funds trailed their benchmark, and the longer the period you measure, the worse the survivors look, because the underperformers do not just lag, many are quietly merged away and disappear from the data altogether. That survivorship bias means the published figures, bad as they are for active large-cap, actually flatter it.

The story is genuinely different in the mid and small-cap space, and this is the part people who have read one passive-evangelism article tend to miss. In the mid and small-cap categories, a majority of active funds have historically beaten their benchmark over one-year and shorter horizons, with underperformance rates well below half in recent SPIVA readings. This is not random. Mid and small-cap India is the part of the market where company-level research still finds genuine mispricing, where a manager who actually visits factories and reads the cash-flow statements can add value that a market-cap-weighted index, which mechanically buys more of whatever has already gone up, cannot. The active premium has not vanished in India. It has retreated to the corner of the market where inefficiency still lives.

So the honest framing is not "passive always wins" or "India is special, pay for active". It is segmented. For large-cap and the broad market, the index is the rational default and the burden of proof sits on any active fund to justify its fee. For mid and small-cap, a good active manager is still worth paying for, with eyes open to the higher risk and higher fees that come with it. Hold that distinction in your head, because the entire portfolio design at the end of this guide flows from it.

The SEBI TRI rule: why post-2018 data looks so much worse for active managers

There is a specific, dateable reason the active-versus-passive numbers turned so sharply against active funds, and it is not that managers suddenly got worse. It is that the goalposts were moved to where they should always have been.

Until early 2018, Indian mutual funds benchmarked themselves against the Price Return Index (PRI). A price return index tracks only the movement in share prices. It ignores dividends entirely. But a real investor in the underlying stocks receives those dividends and reinvests them, and an index fund does the same. So comparing an active fund, which collects and reinvests dividends, against a PRI benchmark, which pretends dividends do not exist, gave the active fund a free head start of roughly 1% to 1.5% a year, the rough dividend yield of the Indian market. Managers could underperform the real, dividend-inclusive market by a percentage point and still appear to "beat the benchmark".

SEBI ended this with a circular dated 4 January 2018, effective 1 February 2018, requiring every scheme to benchmark against the Total Return Index (TRI) instead. The TRI adds reinvested dividends to the price movement, so it measures the full return an index investor would actually have earned. It is the honest bar. The moment funds had to clear it, a large slice of what had looked like skill turned out to be the dividend handicap, and the share of active funds genuinely beating their benchmark dropped accordingly.

Why does this matter to you as an NRI deciding between passive and active today? Because any active-fund track record that straddles the 2018 changeover is measured partly against the wrong, easier benchmark, and a fund's marketing material may still lean on that flattered history. When a relationship manager shows you a fund that "beat its benchmark for fifteen years", a good chunk of that streak was scored against a PRI that did not count dividends. Post-2018, on a TRI basis, far fewer funds clear the bar. Trust the post-2018, TRI-benchmarked data, and discount the pre-2018 glory.

Expense ratio drag: the single biggest lever you control

You cannot control what the market returns, and you cannot reliably control whether your active manager beats the index. The one thing you can control with certainty is what you pay, and over a 20-year horizon that one controllable input does more to determine your final corpus than almost anything else.

Start with the raw spread. A direct-plan Nifty 50 or Nifty 500 index fund in India carries a total expense ratio (TER) in the range of 0.10% to 0.30% all-in, and the cheapest large index ETFs sit even lower. An actively managed large-cap or flexi-cap fund, by contrast, typically charges a regular-plan TER of 1.5% to 2.1%, or a direct-plan TER of roughly 0.8% to 1.2% if you bought without a distributor. Call the realistic gap between a cheap index fund and a typical active large-cap fund somewhere around 0.8% to 1.5% a year. That sounds trivial. It is not, because it is not a one-off charge, it is a percentage skimmed off your entire balance every single year, and it compounds against you in exactly the way your returns compound for you.

There is a second, subtler cost beyond the headline TER, which I cover in full in the hidden costs of Indian funds guide: active funds trade more, so they incur more securities transaction tax, brokerage and market-impact cost inside the fund, none of which shows up in the TER line but all of which drags the NAV. An index fund turns over its portfolio only at rebalancing; an active fund churns it whenever the manager changes his mind. So the true cost gap is usually wider than the TER difference alone suggests.

Now put numbers on it, because a rule stated in the abstract is not finished until you have seen it with a figure.

Worked example: the TER drag, and passive versus active over 20 years

Take Vikram, a UK-based NRI, who invests Rs 50,00,000 as a lump sum into Indian equity and leaves it untouched for 20 years. Assume the underlying Indian equity market, measured on a total-return basis, compounds at 11% a year before fund costs. We will run three scenarios off that same Rs 50 lakh and the same 11% gross market return.

Scenario A, the low-cost index fund. Vikram buys a Nifty 500 index fund with a total drag of 0.20% a year (TER plus a small tracking error). His money compounds at roughly 10.80% net. Over 20 years, Rs 50,00,000 grows to about Rs 3,80,00,000.

Scenario B, the average active fund that exactly matches the index gross. This is the kind scenario for active: assume the manager neither beats nor lags the market before fees, so he delivers the full 11% gross, but his fund charges a regular-plan TER of 1.80%. His net compounding rate is about 9.20%. Over 20 years, the same Rs 50,00,000 grows to about Rs 2,90,00,000.

Scenario C, the realistic active fund that lags the index slightly before fees, as most large-cap funds do. Assume the manager underperforms the market by 0.50% gross, so he earns 10.50% before fees, then deducts the same 1.80% TER, leaving net compounding of about 8.70%. Over 20 years, Rs 50,00,000 grows to about Rs 2,64,00,000.

Line them up:

• Index fund (Scenario A): Rs 3,80,00,000
• Active fund, matches index gross (Scenario B): Rs 2,90,00,000
• Active fund, lags index gross (Scenario C): Rs 2,64,00,000

The gap between the index fund and the kind, fee-only active scenario is roughly Rs 90,00,000 on a starting Rs 50 lakh, and that is before the active manager has put a single foot wrong. The gap to the realistic large-cap scenario is around Rs 1,16,00,000. Read that again. The fee, compounded across two decades, can cost more than the original investment. This is the entire reason the passive case is so strong for the large-cap core: you are not betting that active managers are stupid, you are observing that they have to overcome a 1.5% to 1.8% annual headwind every year just to match a fund that costs 0.2%, and the SPIVA data says most of them do not.

A short note on the arithmetic so you can adapt it to your own numbers. The end value is simply the starting amount multiplied by (1 + net rate) raised to the power of the years. At 10.80% net over 20 years the multiplier is roughly 7.6, at 9.20% it is roughly 5.8, and at 8.70% it is roughly 5.3. The figures above are rounded to the nearest lakh for readability; the point is the size of the gap, not the last digit.

The tax sameness: both are equity funds, taxed identically, with TDS

A common instinct is to assume the more "sophisticated" active fund must carry some tax advantage, or that the cheaper index fund is cheaper because it is somehow taxed worse. Neither is true. Inside the equity bucket, passive and active funds are taxed identically.

What matters for tax is not the management style but the asset mix. A scheme that holds 65% or more in Indian equities is an equity fund for tax purposes, and that definition covers a Nifty 50 index fund, a Nifty 500 ETF, a flexi-cap active fund and a small-cap active fund alike. For all of them, the same rules apply to an NRI:

• Short-term capital gains, on units held 12 months or less, are taxed at 20%.
• Long-term capital gains, on units held more than 12 months, are taxed at 12.5% on the amount above the Rs 1.25 lakh annual exemption, for transfers on or after 23 July 2024, plus the applicable surcharge (capped at 15% for these gains) and 4% cess.
• At redemption, the fund deducts TDS from an NRI's proceeds under Section 195 read with Section 115AD, typically at the relevant capital-gains rate, and you reconcile it against your final liability when you file. The mechanics of that deduction are covered in the TDS on mutual fund redemption guide.

The practical conclusion is clean: tax is never the tiebreaker between a passive and an active equity fund. Choose on cost and on whether the manager can credibly beat the index, then let the identical tax treatment fall where it may. Where tax genuinely does change your strategy is across asset classes, not management styles, and the tax-efficient investing guide walks through how to place equity, debt and gold across your NRE and NRO buckets to minimise the drag.

Why passive suits a hands-off NRI specifically

Everything above applies to a resident investor too. There is an additional argument that applies to you and not to them, and it is the one I weight most heavily when advising NRIs.

An active fund is not a buy-and-forget holding. The whole premise of paying for active management is that the manager's skill, and the fund's edge, persists. But manager edge is fragile. Star managers leave. Funds that beat the index for five years bloat with inflows and then struggle to deploy the larger pool. Mandates drift. A fund you bought because of a specific manager and a specific strategy can quietly become a different animal three years later, and the only way to catch that is to monitor it, read the factsheets, watch the portfolio turnover and be ready to switch. That is real, ongoing work, and switching itself can trigger capital gains and TDS, so it is not costless to act on what you find.

Now picture doing that work from Dubai or Mississauga, in a different time zone, with a day job, while the Indian fund industry sends its communications to an Indian mobile number and a registered email you check occasionally. The honest truth is that most NRIs do not, and realistically cannot, monitor an active portfolio with the diligence the active premium requires. A rules-based index fund asks nothing of you after you set up the standing instruction. It cannot suffer manager departure, it cannot drift from its mandate, and it will never quietly turn into a different fund. For an absentee owner, the passive holding is not just cheaper, it is structurally lower-maintenance, and lower maintenance is worth real money when the alternative is neglect. This is also why I am wary of NRIs holding large active portfolios they inherited from a pre-emigration relationship manager and have not looked at since; the common investing mistakes guide covers that drift in detail.

KYC, eligibility, and the US and Canada access frictions

Before you act on any of this, three practical access points decide what is even available to you.

The first is KYC and eligibility. An NRI can invest in Indian mutual funds, passive and active alike, but only after completing NRI KYC and investing through an NRE or NRO account; the process and the documents are set out in the mutual fund KYC guide. Index funds are bought directly from the asset management company at NAV with no demat account needed; index ETFs trade on the exchange and need an NRI demat and trading account. None of this differs between passive and active open-ended funds, so the KYC hurdle is the same whichever you choose.

The second, and far larger, is the US and Canada problem. Many Indian fund houses simply refuse to accept investments from NRIs resident in the US and Canada, because onboarding them triggers FATCA-driven registration obligations the AMCs would rather avoid. The list of houses that do and do not accept US and Canada money shifts, and the current state of play is tracked in the US and Canada NRI fund-access guide. This access friction applies to passive and active funds equally; it is an AMC-level decision, not a fund-type one.

The third, which sits underneath both, is the PFIC trap for US persons and the parallel harsh treatment for Canadians. Any India-domiciled mutual fund, whether a passive Nifty index fund or an active small-cap fund, is a Passive Foreign Investment Company in US tax eyes, which means Form 8621 per fund every year, taxation at top ordinary rates rather than the favourable equity rates, and an interest charge on deferred gains. The full mechanics, and the cleaner alternatives, are in the PFIC trap guide and the PFIC-safe investing guide. The crucial point for this article: for a US or Canada NRI, the passive-versus-active question is the wrong question. The first decision is whether to hold an India-domiciled fund at all, and for these investors the answer is usually no, in favour of a US-listed India ETF such as INDA or FLIN, or a GIFT City structure. Only once you have cleared that hurdle does the passive-versus-active choice even arise.

A sensible core-satellite approach for an NRI

Put the maths and the practicalities together and a clean structure emerges. It is called core-satellite, and it is the framing I use for almost every NRI equity portfolio.

The core, the large majority of your equity, perhaps 70% to 85%, goes into low-cost passive index funds. A Nifty 50 or, better for breadth, a Nifty 500 index fund covers the large-cap and broad market where active managers reliably fail to beat the index after fees. This core is cheap, it is benchmark-tracking by design, it cannot drift, and it demands nothing of you after setup. It is the part of the portfolio built specifically to be ignored from abroad.

The satellites, the remaining 15% to 30%, are where you can pay for active management in the one place it still earns its fee: a good active mid-cap or small-cap fund, where SPIVA shows the average manager has historically beaten the index, and where the inefficiency that justifies a fee still exists. You might add a thematic or factor tilt here too if you have a considered view, but keep it a satellite, sized so that if it disappoints it dents but does not define your outcome. The satellite is where you accept higher fees and higher risk in exchange for a genuine shot at alpha; the core is where you refuse to pay for a shot that the data says rarely lands.

The discipline that makes this work is rebalancing back to your target weights, which keeps the satellites from quietly taking over the portfolio after a good run and forces you to trim what has surged. Doing that tax-consciously, so you are not triggering needless short-term gains and TDS, is its own skill, covered in the tax-aware rebalancing guide and within the broader asset allocation guide. Set the core, choose one or two satellites with care, automate the contributions, and rebalance once a year. That is a portfolio you can genuinely run from another continent.

Edge cases

Mid and small-cap alpha is real but conditional. The SPIVA data showing active mid and small-cap funds beating their index is an average across a period, not a promise about any single fund or any future window. Mid and small-cap active funds also charge more, carry higher volatility, and can suffer brutal liquidity squeezes in a downturn when the manager cannot exit positions cleanly. The alpha is a reason to consider an active satellite there, not a reason to overweight the segment. And the index alternative is improving: mid-cap and small-cap index funds now exist, so even here you have a passive option if you would rather not bet on a manager at all. The honest position is that mid and small-cap is the one segment where I would not fault an NRI for going active, and equally would not fault one for staying passive.

US and Canada NRIs should solve PFIC before debating fees. As above, for a US person the 0.2%-versus-1.8% fee debate is dwarfed by the PFIC tax penalty on any India-domiciled fund. A 1.8% active fund and a 0.2% index fund are both PFICs, and the tax cost of holding either as a US resident exceeds the fee difference between them many times over. Solve the domicile question first, with a US-listed India ETF or a GIFT City route, and only then optimise for cost. Canadians face a similarly harsh foreign-fund regime and should reason the same way.

Core-satellite is not licence to over-engineer. The most common failure I see is an NRI who reads about core-satellite and ends up with a "core" of four overlapping index funds and eight satellites, which is just an expensive, hard-to-track index fund with extra steps. The point of the structure is restraint: one or two core index funds, one or two genuine satellites, and nothing else. If you cannot explain in one sentence why a fund is in the portfolio, it should not be there. Complexity is the enemy of the hands-off investor, and you are, by virtue of living abroad, a hands-off investor whether you like it or not.

Direct plans, always. Whichever side of the passive-active line a fund sits on, buy the direct plan, not the regular plan. The regular plan bakes in a distributor commission, typically 0.5% to 1% a year, that you pay forever for advice you took once. On an active fund this can nearly double the effective fee drag, and on an index fund it can quadruple the TER. The direct equity versus mutual funds guide covers the broader build-your-own-versus-pooled question, but the direct-plan rule holds across all of it.

The closing read

The active-versus-passive debate in India is no longer a debate at the large-cap end. The post-TRI data is clear: most large-cap and broad-market active funds fail to beat their benchmark after fees over a decade, the fee gap compounds into a corpus-sized difference over twenty years, and you cannot reliably pick the minority that will outperform in advance. For that core of your equity, the index fund is the rational default, and the burden of proof sits on anyone trying to sell you an active large-cap fund. The exception that survives honest scrutiny is mid and small-cap, where active managers still, on average, earn their fee, which is exactly why core-satellite, and not "passive everything", is the sensible structure.

For an NRI specifically, the case for a passive core is stronger still, because the active premium demands monitoring you realistically will not do from another time zone, and an index fund asks nothing of you after setup. The tax treatment is identical across both, so it never decides the question. The one place where all of this gets overridden is the US and Canada passport: if you are a US person, the PFIC regime makes any India-domiciled fund, active or passive, the wrong holding, and you should solve that before you ever reach the fee question. For everyone else, the honest plan is unglamorous and effective: a cheap index core you fund and forget, one or two carefully chosen active satellites where alpha still lives, direct plans throughout, and an annual rebalance. Boring, in this game, is the point.

Related guides

• Index funds and ETFs for NRIs
• Direct equity versus mutual funds for NRIs
• NRI mutual fund eligibility
• The hidden costs of Indian funds for NRIs
• Tax-efficient investing for NRIs
• NRI portfolio asset allocation
• NRI mutual fund KYC
• TDS on mutual fund redemption for NRIs
• Funds not accepting US and Canada NRIs
• The PFIC trap on Indian mutual funds
• PFIC-safe investing in India for US NRIs
• Tax-aware portfolio rebalancing for NRIs
• Common NRI investing mistakes to avoid

---

This guide is general information, not personal financial, tax or legal advice. Tax rates, the Rs 1.25 lakh exemption, surcharge and TDS provisions, and the rules governing NRI fund access can change, and your home-country treatment (including the US PFIC regime and Canadian foreign-fund rules) depends on your specific residency and circumstances. SPIVA outperformance figures are historical averages and do not predict the future. Expense ratios and the 11% market-return assumption used in the worked example are illustrative. Confirm current rules with a qualified cross-border adviser or chartered accountant before acting.