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Alternatives for larger portfolios

Alternative Investment Funds (AIF)

Privately pooled funds that invest in start-ups, private companies, private credit and complex strategies.

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Regulator
SEBI (AIF Regulations, 2012)
Minimum
₹1 crore for most investors
Lock-in
Category I and II funds run for at least 3 years
Investors
High-net-worth individuals, families and institutions
Risk level: Very high

High risk and low liquidity. Money is often locked in for several years and returns vary widely between funds.

What is it?

An Alternative Investment Fund is a privately pooled vehicle registered with SEBI that invests in areas a mutual fund cannot, such as unlisted start-ups, private companies, real estate projects or long-short strategies. They are sold through a private placement memorandum, not to the general public.

Because of their risk and complexity, SEBI sets a high minimum investment of ₹1 crore for most investors, with some exceptions for accredited investors and angel funds.

How it works

  1. You sign a contribution agreement committing a total amount.
  2. Category I and II funds usually draw your commitment in instalments (capital calls) as they find investments.
  3. Returns arrive as the fund exits its investments, often several years later.
  4. The manager earns a management fee and often a share of profits above a hurdle (carried interest).

Types

Category IVenture capital, angel, SME, social impact and infrastructure funds, which SEBI sees as economically beneficial.
Category IIPrivate equity, private credit, real estate and fund-of-funds that do not use leverage beyond operational needs.
Category IIIHedge-fund-style strategies such as long-short equity, which may use leverage and derivatives.

Benefits and risks

Benefits

  • Access to private markets and strategies unavailable through mutual funds.
  • Potential for higher returns from early-stage and private companies.
  • Diversification beyond listed shares and bonds.

Risks and drawbacks

  • Very high minimum investment.
  • Long lock-ins and little or no liquidity.
  • High fees and complex terms.
  • Valuations of unlisted holdings are less frequent and harder to verify.

How it is taxed

  • Category I and II: income is passed through and taxed in your hands as if you had earned it directly, except business income.
  • Category III: taxed at the fund level, so you usually receive post-tax returns.
Rules for FY 2026-27, reviewed November 2026. Surcharge and cess apply on top. Tax rules change, so confirm before you file. Our tax team can help with your return.

Who it may suit

Wealthy, experienced investors who can lock away a small part of a large portfolio for many years and understand private-market risk.

Getting started

  1. Read the private placement memorandum in full, especially fees, lock-in and exit terms.
  2. Check the manager's track record across previous funds, not just the best deal.
  3. Confirm the AIF's SEBI registration number on the SEBI website.
  4. Commit only money you will not need for the fund's full term.

Common questions

Can I exit an AIF early?

Category I and II funds are generally closed-ended, so there is no regular exit. Some allow transfers to other investors with the manager's approval.

How are AIF returns measured?

Usually by IRR (which accounts for the timing of capital calls and distributions) and by total value multiples, rather than simple annual returns.

This guide is general education, not investment, tax or legal advice, and does not recommend any product. Investments in securities markets are subject to market risks; read all related documents carefully before investing.