If mutual funds are the main hall, an AIF is the VIP room. Higher entry, fewer rules about what can be served, and dishes the main hall never sees.
What is an AIF?
A privately pooled fund, registered with SEBI, that invests according to a stated plan. You hold units. Unlike a PMS, you do not own the underlying assets.
Two rules shape everything else. An AIF can only raise money by private placement, so it cannot advertise. And a scheme is capped at 1,000 investors. That is why AIFs stay invisible until someone shows you one.
On who can invest, the rules are blunt. Regulation 10(a) says an AIF may raise funds from "any investor whether Indian, foreign or non-resident Indians". No nationality bar, no residency bar.
What are the three categories?
| Category | What it holds | Typical shape |
|---|---|---|
| Category I | Where the government wants money to go: venture capital, SMEs, infrastructure, social impact | Long lock-ins |
| Category II | Everything else without much leverage: private equity, private credit, real-estate debt | The biggest category. 5 to 8 years |
| Category III | Trading strategies, and it may borrow: long-short, market-neutral, absolute return | Often open, with exit windows |
These are not risk grades. They are strategy buckets. And they are taxed completely differently, which is the part people miss.
What does it cost to get in?
The minimum is ₹1 crore (Regulation 10(c)). Staff and directors of the fund can come in at ₹25 lakh. Accredited investors have no minimum.
Usually that ₹1 crore is a promise, not a cheque. Closed-ended funds draw the money down over years, as deals appear. Plan for the calls. Missing one can be expensive under the fund documents.
Fees are a management fee, often around 2%, plus carried interest: a share of profits above a hurdle. Check whether the management fee is charged on money you committed or money actually invested. In the early years those differ a lot.
The carry is where the real money sits, and where one clause changes everything.
Why "20% over a 10% hurdle" can mean two different things.
You commit ₹1 crore. Six years later the fund returns ₹2 crore. Profit: ₹1 crore.
No catch-up: the manager takes 20% of the gains above the hurdle only. The hurdle absorbs ₹1.77 crore, leaving ₹22.8 lakh. Carry is about ₹4.6 lakh.
Full catch-up: once the hurdle is cleared, the manager takes 20% of the whole ₹1 crore. Carry is about ₹20 lakh.
Same headline terms. Four times the fee. Ask whether there is a catch-up.
How are AIFs taxed?
This is the sharpest difference between categories. Settle it before you invest, not at your first filing.
- Category I and II are pass-through. The fund is not taxed on most income. You are, as though you had made the investments yourself, and the income keeps its original character. The fund sends you a statement. Tax is deducted on distributions.
- Category III is not. Tax is generally settled inside the fund, so what reaches you is already post-tax. The mechanics vary with how the fund is set up, so check yours with your CA.
One practical trap: a Category II gross return and a Category III post-tax return are not the same number. Do not compare them as if they were. Our tax schedule lays them out side by side.
What has the manager got at stake?
More than in most structures, and it is worth checking. Regulation 10(d) requires the manager or sponsor to keep money in the fund: at least 2.5% of the corpus or ₹5 crore, whichever is lower. For Category III it is 5% or ₹10 crore. It cannot be met by waiving fees.
So ask how much of their own money is in, and whether it is just the legal minimum or meaningfully more. That answer tells you more than any deck.
Who is an AIF for?
Someone who already has a working liquid portfolio and is adding money they can genuinely forget about.
The real test is not whether you can find ₹1 crore. It is whether you can commit ₹1 crore, meet capital calls on someone else's timetable, and not touch any of it for five to eight years, without that changing a single decision you make meanwhile.
If that is you, the reason to be here is access, not performance. Private credit, pre-IPO and real assets cannot be packaged into a daily-NAV product. If it is not you, wait. The Fit Finder will say so.
What can go wrong?
- You commit before you know what is bought. Most closed-ended funds are blind pools.
- There is no real secondary market. Early exit is hard, and costly when possible at all.
- Manager dispersion is widest here. Top and bottom quartile are further apart than anywhere listed.
- Capital calls come on the fund's schedule. Defaulting is expensive.
- Interim valuations are estimates. A mark is not a price until something is sold.
Questions people ask
Do I pay ₹1 crore upfront?
Usually not. It is drawn down in tranches. Open-ended Category III funds are more likely to take it at once.
Can NRIs invest in an AIF?
Yes. The rules expressly allow Indian, foreign and non-resident investors. The work is in the exchange-control route, which decides whether your money and gains can go back out, and in your own country's tax rules. Start with the US, the UAE or the UK.
What is the difference between Category II and III?
Category II holds things: private companies, loans, property credit. Category III trades strategies, often listed, and may borrow. They are also taxed differently, as above.
Are angel funds still ₹25 lakh?
No. Since September 2025 they raise only from accredited investors, and no minimum applies.
Is an AIF riskier than a PMS?
Different, not simply more. A PMS carries market risk in shares you can sell any day. An AIF often carries illiquidity risk in assets you cannot sell for years. Which is riskier depends on whether you need the money.
Weighing the two? PMS versus AIF puts them side by side.