Alternative Investment Funds (AIFs) are a relatively new concept, but they are rapidly changing the game for intelligent investors in India. AIFs allow for combined access to private high growth opportunities outside of equities and debt instruments. The majority of the opportunities in India will be available in real estate and private equity. If you are a high net worth individual (HNI) or an institutional investor looking to diversify, knowing about AIFs is necessary as part of due diligence. 

AIFs Provide Unique Access to Unlisted Assets – What Are They and How Do They Work?

AIFs are funds regulated by SEBI – which either pool money from multiple sophisticated investors, or utilize their own capital to invest in asset classes that are alternatives for high risk or long term duration investors, primarily real estate, private equity or hedge funds. Unlike mutual funds, AIFs offer acquisition capabilities for investors that are ready to take on risk and have a time horizon of multiple years to get a return on their investment. AIFs take investment strategies developed by experienced fund managers, combining elements of advanced asset management, that attempt to optimize returns on investments within the scope of alternative investment management. AIFs are a strong wealth management tool for unsurpassed growth that can be unbounded by the limitations of traditional instruments. AIFs have the flexibility to invest in unlisted companies that may also offer monetary value internally across myriad sectors, giving investors a partial disentanglement from traditional investment modes.

The Regulatory Structure and Types of AIFs

SEBI has categorized AIF as a whole into three groups; Category I with venture capital, SME funds to support start-ups and to explore the risk return profile of entrepreneurship; Category II with private equity, real estate as examples; and Category III with hedge funds, commodity funds, etc. Category II AIF with its real estate funds shape 70% of all AIF commitments, indicating the investor preferences. The regulatory structure is supportive with a view to maximize investor protection and transparency but imposes several conditions on the fund structure, disclosure and risk management. The SEBI-governed structure of fund management provides assurance for investors as they are aware their money is being managed responsibly. 

Why AIFs Are a Fit for Sophisticated Investors

The Indian AIF industry has immense growth, from ₹1.5 lakh crore in 2019 to ₹8.5 lakh crore as of 2024 indicative of strong investor appetite. For the last 5 years AIFs have returned between 12-18% rank as some of the top returns for the multitude of traditional investments available. However, AIFs have had an elephant in the room as a requirement to raise funds via minimum ticket sizes of ₹1 crore, which are likely to appeal more to high net worth investors (HNIs) and organizations who can invest. With numerous investment management companies entering the AIF space and with more than 900 AIFs (as of September 2020) registered with SEBI in the given time period, the marketplace is becoming competitive with numerous offerings to meet each requirement.

Exploring the risks and rewards

There is a high level of potential rewards. But AIFs are not riskless. Because of the high entry/committed amount, and the 5-7 (possibly longer) lock-in period, careful and intentional planning is necessary. For those willing to commit, AIFs provide the benefit of diversification (for example, real estate) and access to high-growth industries. For example, AIFs that invest in real estate  investment are exposed to India’s booming property market and provide both income as well as potential capital appreciation. It all comes back to weighing the risk versus the opportunity for outsized returns. 

AIFs are a doorway to tapping growth opportunities, especially for experienced investors looking to take a plunge and invest in alternative assets. With solid growth and returns amidst a strong regulatory framework, AIFs are definitely worth considering in 2025. Make sure you complete your due diligence, consult with a financial advisor, and find out how AIFs can take your investments in India’s high-flying economy to the next level.