How to Invest in AIF in India – A Complete AIF Investment Guide 2026
Key Takeaway Summary
- AIFs are SEBI-regulated, privately pooled investment vehicles designed for HNIs and sophisticated investors.
- The minimum AIF investment in India is ₹1 crore (₹25 lakh for eligible employees/directors).
- Investors can choose from Category I, II, or III AIFs based on risk, return, and strategy.
- AIFs involve capital commitments, drawdowns, longer lock-ins, and lower liquidity than mutual funds.
- With the right selection framework, AIF investment can enhance portfolio diversification and long-term returns.
Introduction
Alternative Investment Funds (AIFs) allow Indian investors to access private equity, venture capital, structured credit, and hedge-style strategies beyond traditional investments.
What Is AIF Investment?
AIF investment refers to investing in a SEBI-regulated Alternative Investment Fund, which pools capital from sophisticated investors to deploy it into non-traditional asset classes.
Unlike mutual funds, AIFs invest in unlisted equities, private debt, real estate, distressed assets, and complex market strategies. These funds are designed for investors who understand higher risk, lower liquidity, and longer investment horizons.
Types of Alternative Investment Funds (AIFs) in India
SEBI classifies AIFs into three broad categories based on their investment approach.
Category I AIFs
Category I AIFs invest in sectors considered socially or economically beneficial.
- Venture capital and start-up funds
- Angel funds and SME funds
- Infrastructure and social venture funds
These AIFs typically focus on long-term capital appreciation.
Category II AIFs
Category II AIFs are the most popular AIF category in India.
- Private equity funds
- Private credit and debt funds
- Real asset-focused strategies
They do not use leverage except for operational requirements and aim for stable, risk-adjusted returns.
Category III AIFs
Category III AIFs use complex and often leveraged strategies.
- Long-short equity funds
- Arbitrage and hedge-style strategies
- Quant and derivative-based approaches
These AIFs carry higher risk and return potential.
Understanding AIF Types & Categories in India
AIF Minimum Investment in India (As per SEBI)
SEBI has set a high entry barrier to ensure only informed investors participate in AIFs.
Investor Type | Minimum Investment |
Regular Investor | ₹1 crore |
| Employee / Director of AIF | ₹25 lakh |
There is no upper limit on how much an investor can allocate to an AIF.
Learn More About the Minimum AIF Investment in India
How to Invest in AIF in India – Step-by-Step Process
- Assess Eligibility and Risk Appetite
Ensure you meet the minimum investment requirement and understand the risk-return profile. - Choose the Right AIF Category
Select Category I, II, or III based on your financial goals and risk tolerance. - Evaluate the Fund Manager
Review track record, strategy clarity, risk management, and governance standards. - Complete KYC and Documentation
Fulfil SEBI-mandated KYC, legal agreements, and onboarding requirements. - Commit Capital to the Fund
Make a capital commitment rather than a lump-sum investment upfront.
How Capital Commitment and Drawdowns Work in AIFs
When you invest in an AIF, you commit a certain amount of capital, but the fund draws it gradually.
- Capital is called in phases as opportunities arise
- Investors must maintain liquidity for drawdowns
- Returns depend on deployment timing and exits
This structure allows fund managers to deploy capital efficiently but requires careful cash-flow planning by investors.
Example of AIF Investment in India
Understanding real-world use cases helps clarify how AIF investments work.
- Private Equity AIF: Invests in unlisted Indian companies aiming for growth or turnaround
- Credit AIF: Lends to mid-sized businesses through structured debt instruments
- Category III AIF: Uses long-short strategies to generate returns across market cycles
Each example reflects different risk, return, and liquidity dynamics.
AIF Lock-in Period, Tenure, and Exit Options
AIFs are long-term investment products.
- Typical fund tenure: 7–10 years
- Lock-in applies until assets are exited
- Early exits are limited or not permitted
Some funds may offer extensions or partial liquidity, but investors should assume capital will remain locked for most of the fund life.
Who Should Invest in AIFs?
AIFs are suitable for investors who:
- Have a high risk tolerance
- Can invest with a long-term horizon
- Seek diversification beyond equities and mutual funds
- Understand illiquidity and complex strategies
Who Should Avoid AIFs?
AIFs may not be suitable for:
- Conservative or first-time investors
- Investors needing short-term liquidity
- Those uncomfortable with return variability
Benefits of AIF Investment
- Access to exclusive and alternative asset classes
- Potential for higher risk-adjusted returns
- Portfolio diversification
- Professional and active fund management
Risks Associated with AIF Investment
- Illiquidity and long lock-in periods
- Market and execution risk
- Limited transparency compared to mutual funds
- Strategy-specific risks
AIF vs Mutual Funds vs PMS – Key Differences
Feature | AIF | Mutual Funds | PMS |
Minimum Investment | ₹1 crore | ₹500 | ₹50 lakh |
Liquidity | Low | High | Medium |
Risk Level | Medium–High | Low–Medium | Medium–High |
Taxation of AIF Investment in India
Tax treatment varies by AIF category.
- Category I & II AIFs enjoy pass-through taxation
- Category III AIFs are taxed at the fund level
- Capital gains depend on asset type and holding period
Professional tax advice is recommended before investing.
How to Choose the Right AIF for Your Portfolio
From an investment advisory perspective, selecting the right AIF requires structured evaluation.
- Assess fund manager track record
- Understand the investment strategy clearly
- Review risk controls and governance
- Evaluate fee structures and alignment of interest
At Aequitas, AIF evaluation focuses on consistency, downside protection, and transparency.
Explore Aequitas’ Alternative Investment Funds
Frequently Asked Questions (FAQs)
What is AIF investment in simple terms?
AIF investment involves pooling money with other investors to invest in alternative assets like private equity, credit, or hedge strategies.
What is the minimum investment required for AIFs in India?
The minimum investment is ₹1 crore per investor, as mandated by SEBI.
Is AIF investment risky?
Yes, AIFs carry higher risk than mutual funds due to illiquidity and complex strategies, but they may offer higher returns.
How long is money locked in an AIF?
Most AIFs have a lock-in and tenure of 7–10 years.
Can retail investors invest in AIFs?
AIFs are primarily meant for HNIs and institutional investors, not retail investors.
Conclusion
AIF investment in India offers a compelling opportunity for sophisticated investors seeking diversification and long-term growth. With clear understanding, disciplined selection, and expert guidance, AIFs can form a valuable component of a well-structured portfolio.
