Alternative investment funds gain currency as fundraise tops Rs 5 trillion | Resources

Alternative investment funds (AIFs) have crossed Rs 5 trillion in terms of funds raised, while the investment commitments have surpassed Rs 12 trillion for the first time as of September, according to data released by the Securities and Exchange Board of India (Sebi).

On a year-on-year basis, the funds raised and commitments in AIFs have surged by around 30 per cent each, with wealthy individuals embracing the investment vehicle in search of better returns.

AIFs are pooled investment vehicles for the affluent, where investments are drawn in tranches, meaning that funds raised trail the commitment amount.

Nearly 70 per cent of these investments are in the unlisted market, where returns can be outsized compared to traditional equity investments in the listed space.

“AIFs offer access to absolute return products across both liquid and illiquid asset classes, including derivatives, private equity, infrastructure, fixed income, and credit. Regulatory reforms introduced by Sebi, aimed at enhancing transparency, have significantly bolstered investor confidence in the AIF sector,” said Deepak Sood, partner and head of fixed income at Alpha Alternatives.

“The growing wealth in India, coupled with the need for diversified asset allocation, is driving the AIF industry; this is further supported by enabling regulatory reforms,” said Rakshat Kapoor, head of private credit and chief investment officer at Modulus Alternatives.

Over the past few years, Sebi has stepped up its monitoring of AIFs and has implemented measures such as valuation, benchmarking, mandatory dematerialisation, and norms on liquidation, which have helped the growth of the segment, according to industry players.

The market regulator has recently proposed changes to the norms governing angel funds, which currently fall under Category I of AIFs and account for over Rs 4,500 crore in funds raised.

The proposals aim to ease certain norms and allow smaller investments by angel funds. However, this may be restricted to accredited investors to address concerns about exposure to high risk.

AIFs that invest in startups, early-stage ventures, and small and medium enterprises fall under Category I AIFs. Category II AIFs, which account for nearly two-thirds of the investments made, invest in real estate funds, private equity funds, funds for distressed assets, etc. The third category includes hedge funds and other funds that use complex trading strategies.

There has also been a surge in the private credit space, with many companies seeking capital from alternative sources beyond banks and non-banking financial companies.

“The multifold growth of private credit within the AIF segment is primarily driven by higher yields, regular income, and well-managed, contained risk as compared to traditional regular-income investments. We see this macro trend continuing for some time,” added Kapoor.

Experts also attribute the growth in AIFs to the rise in the affluent class and investments from family offices seeking consistent performance and high-yielding assets.

Earlier this year, financial regulators raised concerns about the circumvention of key regulations through AIFs, with the amount under scrutiny reaching several thousand crores. However, the Reserve Bank of India and Sebi intervened to curb such instances and imposed certain restrictions to manage the evergreening of loans and circumvention.

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Frequently asked questions

What is an Alternative Investment Fund (AIF)?

An AIF is a privately pooled investment vehicle registered with SEBI that invests in assets beyond traditional listed equity and plain debt — such as private equity, private credit, venture capital, and hedge-fund-style strategies. SEBI classifies AIFs into Category I, II and III.

Who can invest in an AIF in India?

AIFs are meant for sophisticated investors. The minimum commitment is generally ₹1 crore (₹25 lakh for the fund's own employees and directors), and most schemes cap the number of investors per scheme at 1,000.

How is an AIF different from a mutual fund?

Compared with mutual funds, AIFs have far higher minimums, lower liquidity (often multi-year lock-ins or drawdown structures), lighter day-to-day disclosure, and — in Category III — the ability to use leverage and derivatives. They target a smaller, more sophisticated investor base.

How are AIFs taxed?

Broadly, Category I and II AIFs enjoy pass-through status — income (other than business income) is taxed in the hands of investors — while Category III AIFs are typically taxed at the fund level. Tax treatment is complex and depends on the income type; confirm specifics with your tax advisor.

Key terms

Category I / II / III: SEBI's three AIF buckets: Cat I (start-ups, SME, infra, social ventures), Cat II (private equity, private credit, real estate funds — no leverage for investing), Cat III (hedge-fund-style strategies that may use leverage and derivatives).
Commitment & drawdown: The total amount an investor agrees to invest (commitment) is called down by the fund in tranches (drawdowns) as it deploys capital, rather than all upfront.
Hurdle rate: The minimum return a fund must deliver to investors before the manager earns performance fees (carry).
Carry (carried interest): The manager's share of profits above the hurdle rate — commonly around 20% — that aligns the manager's payout with investor returns.
Lock-in: The period during which committed capital cannot be redeemed. Cat I and II AIFs are close-ended with multi-year tenures.