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A Complete Guide

Alternative Investment Funds

What an AIF is, the three SEBI categories, how the commitment-and-drawdown lifecycle works, the key terms, risks and tax — a primer for partner conversations.
01What is an AIF?

An Alternative Investment Fund is a privately pooled, SEBI-registered vehicle that invests in assets beyond listed equity and plain debt — private equity, venture capital, private credit, real estate and hedge-style strategies. The SEBI minimum is ₹1 crore. AIFs are built for sophisticated, long-horizon investors and are typically used as a satellite, not a core, allocation.

1 Commit

You commit capital (₹1 Cr+) — it isn't all invested upfront.

2 Drawdown

The fund calls capital in tranches as opportunities arise.

3 Deploy

The manager (GP) invests into private assets and manages them.

4 Exit

Returns come via exits / maturities; the fund winds down at end of tenure.

02The Three Categories
Category I

VC, angel, SME, infrastructure and social-venture funds — economically desirable, sometimes incentivised. Close-ended.

Category II

PE, private credit / debt, real estate and fund-of-funds. The largest category (~78%); no leverage beyond operational needs. Close-ended.

Category III

Hedge-fund-style, long-short and public-market strategies; may use leverage and derivatives. Often open-ended.

03Key Terms to Know
Commitment

The total capital you agree to invest over the fund's life.

Drawdown / Capital Call

When the fund calls portions of your commitment to deploy.

Dry Powder

Committed capital that hasn't yet been drawn or deployed.

IRR & MOIC

IRR is the annualised return; MOIC the multiple of invested capital.

Hurdle & Carry

The GP's performance share (carry) earned above a hurdle rate.

Sponsor Commitment

The manager's own capital in the fund — "skin in the game."

04Structure & Lifecycle

Cat I and Cat II are typically close-ended with a fixed tenure (often 5–10 years) and a J-curve — early fees and drawdowns weigh on returns before exits deliver gains. Cat III is often open-ended. Capital is called over a commitment period, deployed, then harvested toward the fund's wind-down.

05Benefits & Risks
Why investors use them
  • Access to private / alternative assets unavailable in public markets.
  • Diversification — return drivers uncorrelated with listed markets.
  • Return potential — differentiated, often higher-return strategies.
  • Specialist GPs — managers with deep domain expertise.
Risks to weigh
  • Illiquidity — capital is locked for the fund's life; no easy exit.
  • J-curve & drawdown timing — cash-flow planning is essential.
  • Blind-pool — you commit before all assets are known.
  • Valuation & GP dependence — opaque marks; outcomes hinge on the manager.
06How They're Taxed
CategoryTax treatment
Category I & IITax pass-through — income (other than business income) is taxed directly in the investor's hands, as if invested directly.
Category IIITaxed at the fund level; investors receive distributions post-tax.
Note: Tax treatment is nuanced and can change. Confirm the specifics for the fund with a tax advisor before acting.
07Who It's For & How to Evaluate
Suitability

A ₹1 Cr+ product for UHNI / sophisticated investors with a long horizon and tolerance for illiquidity and complexity — sized as a satellite allocation, not the core.

How to evaluate
  • GP track record & prior-fund IRRs.
  • Vintage & deployment pace.
  • Lock-in / liquidity terms and tenure.
  • Fee load — management + carry + hurdle.
  • Drawdown schedule — plan the cash flows.