Alternative investment funds
AIFs
A privately pooled fund, for a long commitment
AIFs are privately pooled investment vehicles registered with SEBI. They invest in areas most conventional funds do not, and they ask for a long, illiquid commitment in return.
three regulatory categories
Category I, II and III under the SEBI (Alternative Investment Funds) Regulations, each with a different mandate.
a high entry threshold
The minimum investment is generally ₹1 crore per investor, and commitments are typically drawn over time.
at a glance
How this one behaves
The least liquid and the highest threshold here. Capital is committed for years, and that illiquidity is the trade being made, not a side effect.
- Minimum
- ₹1 crore per investor, set by SEBI
- What you hold
- Units of a privately pooled vehicle
- Taxed
- Category III funds are taxed at the fund level
- Getting out
- Assume you cannot, for the full term
how it works
Illiquidity is the central trade-off
Everything distinctive about AIFs follows from one fact: your money is committed for years and cannot readily be withdrawn. Category I and II AIFs are typically close-ended with a minimum tenure of three years, frequently longer in practice, and often with extension provisions. There is no daily redemption, no reliable secondary market, and no assurance you can exit early at any price. Anyone considering an AIF should assume the money is genuinely unavailable for the full term.
The categories are not tiers of quality — they are different mandates. Category I covers funds investing in areas regarded as socially or economically desirable: venture capital, SME funds, social venture funds and infrastructure funds. Category II is the broadest and most commonly encountered, covering private equity and debt funds that do not use significant leverage for day-to-day operations. Category III covers funds employing complex or diverse strategies, including long-short strategies, and may use leverage — which introduces risks the other categories generally do not carry.
Capital calls change how you must plan. You commit a total amount, but the fund draws it down in tranches as it finds investments, often over several years. That means you need the committed capital available when called, at dates you do not control. Failing to meet a call can carry penalties under the fund documents, including loss of part of your interest in the fund. The liquidity planning around an AIF commitment is as important as the investment case.
Valuation is less transparent than in listed markets. Underlying holdings are frequently private companies or unlisted instruments with no daily market price, so reported values rest on periodic valuation exercises rather than observable prices. Interim statements are therefore estimates, and the realised outcome only becomes clear as investments are actually exited.
Concentration is usually higher than in conventional funds — an AIF may hold a relatively small number of substantial positions, so the failure of one can materially affect the whole. Combined with a long lock-in, that argues for treating any AIF commitment as a deliberately sized portion of overall wealth rather than a large one.
pms or aif
Seven structural differences worth knowing
These two get compared on past returns, which is the least reliable basis for choosing between them. The differences below hold whichever manager you look at.
| Characteristic | PMS | AIF |
|---|---|---|
| How your money is held | Securities sit in your own demat account as direct holdings. You can see the actual stocks. | You hold units of a pooled vehicle. The fund owns the underlying securities, not you. |
| Pooled or separate | Managed separately for each client, within an agreed mandate. | Capital is pooled and managed collectively for all investors in the scheme. |
| Who it is open to | Individuals and eligible investors meeting the ₹50 lakh regulatory minimum. | Investors meeting the ₹1 crore minimum, plus institutions and accredited investors. |
| How gains are taxed | In your hands, at the rate applicable to you, as though you held the securities directly. | Category III funds are taxed at the fund level before anything reaches you. |
| Unlisted and pre-IPO exposure | Not part of the structure. | Permitted, up to whatever share of the portfolio the scheme documents allow. |
| Tenure | No fixed tenure. You can exit under the terms of your agreement. | Set by the scheme. Category I and II are usually close-ended over several years; some Category III schemes are open-ended. |
| If you are a non-resident | Can generally be funded from either an NRE or an NRO account. | Category III commonly accepts NRO money only — which matters if you want to repatriate. |
Minimums are regulatory thresholds, not quality signals, and both figures place these categories outside the range of most investors. See NRI investing for the non-resident detail.
Six fee terms to ask about before you sign anything
- Management fee
- Charged on assets, every year, whether the portfolio rises or falls. A structure with no management fee is not free — it is charging elsewhere.
- Hurdle rate
- The return that has to be cleared before any performance fee applies. A zero hurdle means the manager shares in the very first rupee of gain.
- High-water mark
- Stops you paying a performance fee twice for recovering the same losses. Ask whether it applies over the life of the investment or resets.
- Catch-up
- Where present, once the hurdle is cleared the manager takes an outsized share of the next slice of return until the split evens out. Ask whether there is one.
- Exit load
- A charge for leaving early, usually tapering over the first few years. It sets the real minimum holding period, whatever the stated tenure says.
- Custodian
- The institution that actually holds the assets, separate from the manager. Worth knowing the name, because it is a meaningful part of the safeguards.
Two structures with the same headline performance fee can leave you with materially different net returns once these six are taken together. Ask for the terms in writing, and read the disclosure document rather than the presentation.
risk
What can go wrong
Every investment on this site carries risk. These are the ones that matter most for this category.
illiquidity and lock-in
Capital is committed for years with no reliable early exit. Assume the money is unavailable for the full term.
concentration and complexity
Holdings are often few and substantial, valuations are periodic rather than observable, and Category III may use leverage.
capital and call risk
Investors can lose part or all of their capital, and failing to meet a capital call can carry penalties under the fund documents.
faqs
Questions about AIFs
Generally ₹1 crore per investor under the SEBI AIF Regulations, with a lower threshold applying to employees and directors of the fund manager. It is a regulatory minimum, and it places AIFs outside the range of most investors.
Usually not. Category I and II AIFs are typically close-ended with multi-year tenures and no redemption facility, and there is no dependable secondary market for these interests. The correct planning assumption is that the committed capital is unavailable until the fund distributes it.
You commit a total amount up front but pay it in instalments as the fund requests them, typically over several years and on dates the fund determines. You therefore need to keep the uncalled commitment available. Missing a call can trigger penalties set out in the fund documents, which may include forfeiting part of your interest.
They are different, not better. AIFs access strategies and assets conventional funds cannot, but they do so by accepting illiquidity, longer horizons, higher concentration, less frequent valuation and generally higher fees. Whether that trade-off suits an investor depends entirely on the rest of their portfolio and their liquidity position — and for many investors it does not.
Risk and important information
Alternative Investment Funds are high-risk, illiquid investments intended for investors able to commit capital for extended periods. Capital is typically locked in for years with no assurance of early exit, investors may lose part or all of their capital, and returns are neither assured nor guaranteed. Portfolios may be concentrated, underlying holdings are often unlisted and valued periodically rather than by observable market prices, and Category III funds may employ leverage. Failure to meet a capital call can result in penalties including loss of part of your interest in the fund. Please read the Private Placement Memorandum and all fund documents carefully before investing. Nothing on this page is investment advice or a recommendation.
let's talk
Let's start with a conversation
There's no obligation, no pressure — just a conversation about where things stand and where you'd like to go.