Despite global challenges like the COVID-19 pandemic and the Russia-Ukraine war, India’s Alternative Investment Funds (AIF) market has seen explosive growth, transforming into a powerhouse for high-net-worth and institutional investors. With commitments skyrocketing from just ₹19,679 crore in 2014 to over ₹13 lakh crore by 2024, AIFs are reshaping the investment landscape. They fuel startups, infrastructure, and private equity, and their influence on India’s financial ecosystem continues to grow.
Alternative Investment Fund means any fund established or incorporated in India in the form of a trust, a company, a limited liability partnership or a body corporate. It collects funds from investors (institutions and high-net-worth individuals), both Indian and foreign, to invest in alternative asset classes such as venture capital, private equity, hedge funds, real estate, commodities, and derivatives. Alternative Investment Funds are unique investment options that differ from conventional investment instruments, such as mutual funds, bonds, and stocks.
Types of Alternative Investment Funds :
SEBI guidelines divide AIFs into three categories.
Category I Alternative Investment Funds :
This type of Alternative Investment Fund (AIF) invests in startups, early-stage companies, social enterprises, small and medium enterprises (SMEs), infrastructure projects, and other areas the government or regulatory authorities consider socially or economically beneficial. It also includes various sub-classifications.
- Infrastructure Fund: This fund exclusively invests in infrastructure initiatives, including the construction of bridges, airports, and railways.
- SME Fund: This fund targets small and medium enterprises with a proven track record of profitability and growth.
- Social Impact Fund: This fund invests in companies driving social or environmental impact, like those in sustainability or clean energy. It also boasts a history of delivering strong returns.
- Special Situation Fund: This fund invests in special situations or distressed assets. Non-Banking Financial Companies (NBFCs) use it to address their Non-Performing Assets (NPAs), which experts project to grow at 8–9%. It suits investors who are willing to take high risks.
- VCF (Angel Fund): These funds gather investments from High Networth Individuals (HNI) seeking to acquire stakes in emerging startups. The minimum commitment for an angel investor in this scheme is 25 lakhs.
- Venture Capital Fund (VCF): This fund invests specifically in start-up ventures with high growth potential. This scheme needs substantial investment due to the initial days of doing business, and that is why these funds pool money from institutions.
Category II Alternative Investment Funds :
Category II AIFs encompass funds that do not qualify under Categories I or III. These funds refrain from using leverage or debt, except to meet routine operational expenses. Examples of funds falling within Category II include:
- Private Equity Funds: They make investments in private limited companies that can’t be publicly traded to help them raise capital. Private equity funds provide unlisted companies with an efficient means to raise capital, addressing the challenges they often face in securing funding through traditional debt or equity channels.
- Debt Funds: This fund invests in debt securities of unlisted companies such as bonds, debentures and other fixed-income securities. Suitable for investors seeking regular income during the period of investment.
- Fund of Funds: This fund invests in any other one or more alternative investment funds. Instead of directly buying stock or bonds in companies, it invests in other AIFs and can have diversified portfolios.
Category III Alternative Investment Funds :
Category III AIFs employ sophisticated trading strategies for their investments and may utilise leverage or debt to invest in listed or unlisted derivatives. Examples of funds in this category include:
- Private Investment in Public Equity Fund (PIPE): This fund focuses on investing in the equity of companies listed on stock exchanges, typically when the company’s share value has declined, and it seeks to raise capital. As a result, AIFs often acquire the equity at a discounted price.
- Hedge Fund: A “hedge fund” refers to an Alternative Investment Fund that utilises a variety of advanced or intricate trading strategies and engages in investing and trading in securities, including listed and unlisted derivatives, which involve diverse risks or complex financial instruments.
Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 – SEBI’s official regulations document, last amended on August 6, 2024, covering definitions, categories, registration rules, investor limits, and more
Rise of Alternative Investment Fund in the last 10 years:
The data from SEBI illustrates the exponential growth of AIFs in India:
| Quarter Ending | Commitments Raised (Rs. in Crores) | Funds Raised (Rs. in Crores) | Investments Made (Rs. in Crores) |
| December 2014 | 19,679.94 | 7013.01 | 5,721.35 |
| December 2019 | 3,47,801.80 | 1,71,712.90 | 1,42,115.10 |
| December 2024 | 13,05,179.00 | 5,27,284.00 | 5,06,176.00 |
“Commitments raised” refer to the total amount that investors have agreed to invest in an AIF over time. From those total commitments, the funds collected by the AIF indicate “funds raised”, and from such funds raised, how much investments were made by them in different companies is what “investments made” refers to.
From December 2014 to December 2024, commitments raised surged from ₹19,679.94 crore to ₹13,05,179.00 crore, marking a compound annual growth rate (CAGR) of approximately 55%. Funds raised and investments made have also shown substantial increases, reflecting growing investor confidence and the expanding role of AIFs in India’s financial landscape.
While Alternative Investment Funds cater to high-net-worth individuals and institutional investors with a higher risk appetite, they are often compared with more traditional investment vehicles like Mutual Funds. However, AIFs differ significantly in structure, regulation, and investment strategy. If you’re new to investing or want to understand the broader landscape, it’s helpful to first explore the different types of Mutual Funds available in India, as they form the foundation of most retail investors’ portfolios.
Investments Made in Each Category of AIFs – 2019 Vs 2024
By December 2024, Category II AIF dominated with 77% commitments, 67% funds raised, and 63% of total investments made. This category includes private equity and debt funds, which have been instrumental in financing infrastructure and real estate projects. Out of Category I funds, Venture capital funds and infrastructure funds have raised high commitments. As per SEBI, Venture Capital Funds invested over ₹20,000 crores in the quarter ending December 31, 2024, as shown.
Which sectors were impacted the most?
Here are the top 10 sectors the funds from AIFs flowed into. The Real estate sector has raised more funds than all other sectors, amounting to Rs. 73,903 Cr, which is 15% of total investments made, and the IT services sector grabbed 6%, as shown in the chart below. Other major investments have flowed into financial services, banking and pharmaceutical sectors.
Conclusion:
The Alternative Investment Fund (AIF) market in India has witnessed remarkable growth over the past decade, driven by increasing investor confidence and the diversification of investment strategies. Category II AIFs, particularly private equity and debt funds, have dominated the space, accounting for the largest share of commitments, funds raised, and investments made. These funds have played a crucial role in financing infrastructure, real estate, and private enterprises. AIFs are poised for continued expansion, with projections indicating substantial growth by 2030. As more investors, including high-net-worth individuals and institutions, explore alternative assets, AIFs will further shape India’s financial ecosystem, offering diverse opportunities beyond traditional investment avenues.
