Alternative Investment Funds (AIFs) in India: A Complete Guide for 2025

When traditional investments like stocks and bonds no longer seem enough, sophisticated investors in India are turning to Alternative Investment Funds. These privately pooled vehicles have evolved from a niche option to a mainstream asset class, with commitments crossing Rs 13.5 lakh Crore as of March 2025. But what exactly are AIFs, and should you consider them for your portfolio?​

What Are Alternative Investment Funds?

Alternative Investment Funds are privately pooled investment vehicles regulated by the Securities and Exchange Board of India (SEBI) under the AIF Regulations, 2012. Unlike mutual funds that invest primarily in listed stocks and bonds, AIFs cast a wider net. They invest in private equity, venture capital, real estate, hedge funds, startups, and other non-traditional assets.​

The structure typically involves three key participants. The settlor creates the AIF trust, the trustee operates the fund pool, and contributors invest funds into it. AIFs can be set up as trusts, companies, or Limited Liability Partnerships (LLPs).​

As of September 2025, there are 1,550 registered AIFs operating in India. The sector has witnessed remarkable momentum, with investments rising 32% to reach Rs 5.38 trillion by March 2025, up from Rs 4.07 trillion in the previous year.​

Three Categories of AIFs

SEBI classifies Alternative Investment Funds (AIFs) into three distinct categories based on investment strategies and risk profiles.​

Category I AIFs focus on sectors that promote economic growth and social impact. These funds receive government encouragement through tax benefits and regulatory support. The category includes Venture Capital Funds that back early-stage startups, SME Funds supporting small and medium enterprises, Social Venture Funds investing in sustainability projects, and Infrastructure Funds financing large-scale projects like roads and smart cities. Category I AIFs have raised Rs 40,790 crore and invested Rs 32,522 crore across various schemes.​

Category II AIFs invest primarily in private equity, debt securities, and real estate without taking excessive leverage. This category includes Private Equity Funds, Debt Funds targeting unlisted company securities, Real Estate Funds, and Fund of Funds that invest in other AIFs. Category II represents the largest segment, having raised Rs 3.66 lakh crore and deployed Rs 3.32 lakh crore out of commitments totaling Rs 10.3 lakh crore.​

Category III AIFs employ sophisticated trading strategies including hedge funds, derivatives, short selling, and leverage to generate short-term returns. These include Hedge Funds using complex strategies and PIPE (Private Investment in Public Equity) Funds investing in listed companies at discounted rates. Category III AIFs have raised Rs 89,950 crore and deployed Rs 98,491 crore.​

Who Can Invest in AIFs?

AIFs cater to a select investor base. Indian residents, Non-Resident Indians (NRIs), and foreign nationals can all invest. However, these funds target sophisticated investors with substantial capital.​

The minimum investment threshold stands at Rs 1 Crore for most investors. For employees, directors, or fund managers associated with the AIF, the minimum drops to Rs 25 lakh. This high barrier ensures only High Net Worth Individuals (HNIs), Ultra HNIs, and institutional investors participate.​

Each AIF scheme can accommodate a maximum of 1,000 investors at any given time. For Angel Funds specifically, this cap reduces to 200 investors.​

How AIFs Differ from Mutual Funds

The differences between AIFs and mutual funds are substantial, starting with accessibility. Mutual funds allow investments as low as Rs 100 through SIPs, while AIFs require Rs 1 crore minimum.​

Asset flexibility marks another major distinction. Mutual funds primarily invest in listed securities like stocks, bonds, and gold. AIFs can invest in unlisted companies, private equity, real estate, derivatives, and other alternative assets.​

Liquidity varies dramatically. Mutual funds, particularly open-ended schemes, offer daily liquidity where you can redeem units at prevailing NAV. AIFs typically impose lock-in periods of 3 to 7 years, making them far less liquid. Category I and II AIFs must operate as closed-ended funds with minimum tenures of 3 years. ​

Regulation differs too. While both fall under SEBI's purview, mutual funds face more stringent disclosure requirements and must share performance data publicly. AIFs have lighter disclosure norms, with quarterly reporting for most categories and monthly reporting only for leveraged Category III funds.​

The investor base reflects these differences. Mutual funds serve retail and institutional investors alike, while AIFs exclusively target HNIs and sophisticated investors.​

Registration and Regulatory Framework

Setting up an  Alternative Investment Funds (AIF) involves multiple steps. Applicants must visit the SEBI portal (siportal.sebi.gov.in) and file for registration. The application fee stands at Rs 1 lakh plus 18% GST, payable online.​

Once SEBI approves the application, registration fees vary by category. Category I AIFs pay Rs 5 lakh plus GST, except Angel Funds which pay Rs 2 lakh plus GST. Category II AIFs pay Rs 10 lakh plus GST, while Category III AIFs pay Rs 15 lakh plus GST.​

Each AIF must maintain a minimum corpus of Rs 20 crore, reduced to Rs 5 crore for Angel Funds. At least one key investment team member must obtain certification by passing the NISM Series XIX-C: Alternative Investment Fund Managers Certification Examination.​

The sponsor or manager must maintain continuing interest in the fund. For Category I and II AIFs, this means holding at least 2.5% of corpus or Rs 5 crore, whichever is lower. For Category III AIFs, the requirement is 5% of corpus or Rs 10 crore, whichever is lower.​

The entire registration process, including SEBI's assessment, typically spans four to six months.​

Taxation of AIFs

Tax treatment varies significantly across categories. Category I and II AIFs benefit from pass-through taxation, meaning the fund itself pays no tax on income (except business income). Instead, tax liability passes to investors who pay based on their individual tax profiles.​

For capital gains, long-term gains (held over 36 months) face a 10% tax on amounts exceeding Rs 1 lakh. Short-term gains (held under 36 months) attract 15% tax.​

Category III AIFs face fund-level taxation. The income is taxed at the fund level before distribution to investors, who then pay taxes again based on their personal tax status.​

The 2025 Union Budget brought key changes: 

The long-term capital gains exemption threshold increased, and the tax rate standardized at 10% for gains above Rs 1 lakh (previously 20% with indexation). TDS on capital gains for foreign investors dropped from 15% to 10%, aligning with Double Taxation Avoidance Agreements.​

Performance Track Record

AIFs have demonstrated resilience despite market volatility. In FY2025, long-short AIFs delivered an average return of 8.68%, outperforming the Nifty 50 TRI (6.65%) and BSE 500 TRI (5.96%).​

Among long-only AIFs, top performers showed impressive numbers. Finavenue Growth Fund led with 46.66% returns, followed by Negen Undiscovered Value Fund at 33.61%. For long-short strategies, Swyom Advisors' India Alpha Fund topped charts with 31.79% returns.​

Between June 2019 and June 2024, AIFs' total assets under management grew at a CAGR of 28%. Notably, 75% of AIFs successfully generated positive alpha, outperforming traditional benchmarks.​

Sector-wise, Real Estate dominated with cumulative net investments of Rs 69,896 crore, followed by IT/ITes at Rs 34,553 crore, Financial Services at Rs 27,223 crore, NBFCs at Rs 25,564 crore, and Banks at Rs 23,793 crore.​

Key Benefits of AIF Investments

Portfolio diversification stands out as a primary advantage. AIFs invest in asset classes uncorrelated with traditional markets, helping spread risk across different sectors. This becomes especially valuable during equity market volatility.​

The potential for higher returns attracts sophisticated investors. By accessing private equity, venture capital, and distressed assets, AIFs can deliver returns significantly above traditional mutual funds. Fund managers employ active strategies, taking concentrated bets in high-potential opportunities unavailable in public markets.​

Professional management ensures expert oversight. Fund managers with deep sector knowledge conduct thorough due diligence before deploying capital. They actively monitor investments and adjust strategies based on market conditions.​

Access to exclusive opportunities gives investors exposure to unlisted companies, early-stage startups, infrastructure projects, and private debt that retail investors cannot access directly.​

Lower correlation with stock market movements provides stability. Since AIFs aren't directly subject to equity market volatility, they can deliver relatively stable returns during bearish phases.​

Risks and Challenges

Illiquidity presents the biggest challenge. Unlike mutual funds where you can exit anytime, AIFs lock your capital for 3 to 7 years or longer. If you suddenly need funds, selling AIF units proves extremely difficult.​

Market risk remains substantial. AIFs often invest in startups, unlisted firms, or distressed assets that can deliver multi-bagger returns but also carry risk of complete loss. Venture-backed startups might fail, or real estate projects could stall.​

High fees impact returns. Due to the complex nature and expertise required, AIFs charge higher management fees and performance fees compared to mutual funds. These costs can eat into your overall returns.​

Limited transparency creates information asymmetry. AIFs don't disclose fund information publicly like mutual funds do. Investors receive periodic reports, but detailed performance comparisons across funds remain challenging.​

Regulatory complexity requires constant attention. Navigating the evolving AIF regulatory landscape demands expertise and ongoing compliance monitoring.​

The high minimum investment of Rs 1 crore restricts participation to only wealthy individuals and institutions.​

Investment Process for AIFs

Start by evaluating your eligibility and financial capacity. Ensure you meet the Rs 1 crore minimum investment threshold and can commit funds for 3 to 7 years.​

Research different AIF categories and strategies. Category I suits investors interested in early-stage ventures and infrastructure. Category II appeals to those seeking private equity and real estate exposure. Category III targets investors comfortable with leverage and complex strategies.​

Select fund managers carefully. Evaluate their track record, investment philosophy, and sector expertise. Check the fund's past performance, though remember past returns don't guarantee future results.​

Complete KYC documentation. For NRIs, this includes PAN card, passport, overseas address proof, and photographs. You'll also need to set up an NRE or NRO account with an authorized Indian bank.​

Review the Private Placement Memorandum (PPM) thoroughly. This document contains detailed information about the fund's strategy, risk factors, fee structure, and exit options.​

Execute the contribution agreement and transfer funds from your bank account to the designated AIF account. ​

The Road Ahead

The AIF industry in India shows strong growth momentum. Technology is transforming fund management through AI-driven portfolio construction, automated compliance, and enhanced investor reporting. About 48% of key industry players adopted artificial intelligence in FY2024, with 80% of financial institutions now employing AI in compliance and risk monitoring.​

Private credit is emerging as a dynamic segment, accounting for roughly 15% of total AIF commitments at Rs 1.95 lakh crore. Domestic capital is increasingly leading this space, signaling market maturity.​

The investor base continues expanding beyond institutions. Family offices and HNWIs now account for 80 to 90% of funds raised in AIFs. Investments by HNIs jumped to Rs 5.38 trillion by March 2025, up 32% year-on-year.​

Regulatory evolution continues with SEBI strengthening compliance frameworks while maintaining operational flexibility. The industry has transitioned from light-touch regulation to more robust oversight as systemic importance grows.​​

Total commitments reached Rs 14.2 trillion (USD 160.8 billion) as of June 2025, growing 20% year-on-year. This trajectory positions AIFs as a cornerstone of modern portfolio construction in India.​

Conclusion

Alternative Investment Funds have matured into a legitimate asset class for sophisticated investors seeking diversification beyond traditional markets. With Rs 13.5 lakh crore in commitments and growing regulatory support, AIFs offer access to private equity, venture capital, real estate, and structured credit opportunities previously inaccessible to most investors.

The high minimum investment of Rs 1 crore, extended lock-in periods, and complex strategies make AIFs suitable only for HNIs and institutions who can absorb illiquidity and higher risk. However, for those who qualify, AIFs provide professional management, exclusive deal flow, and potential for differentiated returns uncorrelated with public markets.

Before investing, evaluate your liquidity needs, risk tolerance, and investment horizon carefully. Work with financial advisors who understand the AIF landscape, scrutinize fund manager track records, and ensure the investment aligns with your overall portfolio strategy. AIFs aren't for everyone, but for the right investor, they represent a powerful tool for long-term wealth creation.

Frequently Asked Questions (FAQs)

What is the minimum investment required for AIFs in India?

The minimum investment for most AIFs in India is Rs 1 crore. However, employees, directors, or fund managers of the AIF can invest with a reduced minimum of Rs 25 lakh. This high threshold ensures only sophisticated investors with substantial capital participate in these funds. Angel Funds, a sub-category under Category I, also allow Rs 25 lakh minimum for angel investors.​

How long is the lock-in period for AIF investments?

Lock-in periods vary by category. Category I and II AIFs are closed-ended funds with a minimum tenure of 3 years, though this can extend to 5 years for Angel Funds. Category III AIFs may be open-ended or closed-ended, typically ranging from 1 to 10 years depending on the strategy. Unlike mutual funds where you can redeem anytime, AIF investments remain locked for the specified period, making liquidity a key consideration.​

Can NRIs invest in AIFs in India?

Yes, NRIs can invest in all categories of AIFs in India. They need to set up an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account with an authorized Indian bank and obtain a Portfolio Investment Scheme (PIS) account as per RBI guidelines. NRIs must complete KYC requirements including PAN card, passport, overseas address proof, and make a FEMA declaration. NRE accounts work best as they provide full repatriation benefits and remain tax-free in India.

How are AIFs taxed differently from mutual funds?

Category I and II AIFs benefit from pass-through taxation where the fund pays no tax and liability passes to investors based on their tax profiles. Long-term capital gains (over 36 months) are taxed at 10% above Rs 1 lakh, while short-term gains face 15% tax. Category III AIFs face fund-level taxation before distribution to investors. Mutual funds follow different capital gains rules based on equity or debt orientation, with equity LTCG at 10% above Rs 1 lakh for holdings over 12 months and STCG at 15%.​

Who should consider investing in AIFs?

AIFs are best suited for High Net Worth Individuals (HNIs), Ultra HNIs, family offices, and institutional investors. Ideal investors have surplus capital of at least Rs 1 crore that they can lock away for 3 to 7 years, possess high risk tolerance, understand complex investment strategies, and seek portfolio diversification beyond traditional assets. AIFs aren't appropriate for retail investors needing liquidity or those uncomfortable with higher volatility and limited transparency. Working with financial advisors who specialize in alternative investments helps determine if AIFs align with your financial goals.​