Who can invest, and what you need
AIFs are regulated under the SEBI (Alternative Investment Funds) Regulations, 2012, and are offered privately rather than to the public. The minimum investment is ₹1 crore per investor.
- Who can invest: resident individuals, HUFs, companies, trusts and LLPs, and NRIs subject to FEMA requirements.
- Documents: PAN, Aadhaar, bank proof and KYC; a demat account, since AIF units are generally issued in dematerialised form.
- Commitment, not just cash. In a closed-ended fund you commit an amount and pay it in tranches when called, often over two to four years.
- Horizon: Category I and II funds are closed-ended with a minimum tenure of three years, and in practice often run five to eight years before capital is fully returned.
New to the structure? Start with AIFs explained, which sets out the three categories.
Choosing between the categories
| Category I & II | Category III | |
|---|---|---|
| Typical strategies | Venture capital, private equity, pre-IPO, private credit, real estate | Long-short, long-only, arbitrage, quantitative and options strategies in listed markets |
| Liquidity | Locked in for the life of the fund | Often open-ended, with periodic redemption windows |
| How capital goes in | Committed, then drawn down in tranches | Usually invested in full at the start |
| Tax | Passed through to you, by the nature of the income | Paid at the fund, often at the maximum marginal rate |
| Best suited to | Money you can genuinely leave untouched for years | A hedged or differentiated listed-market allocation |
Because Category III funds are taxed at the fund and report returns after tax, their numbers cannot be compared directly with a PMS’s pre-tax returns. PMS vs AIF goes through the differences.
What we check in the PPM
The private placement memorandum is where an AIF’s real terms live. The clauses that matter most:
- The waterfall: the order in which money comes back, and when the manager earns carry.
- Hurdle and catch-up: the return you receive before the manager shares in profits, and how quickly they catch up afterwards.
- Fees on what: whether the management fee is charged on committed or invested capital, and what the fund’s own expenses add.
- Tenure and extensions: the stated life, and how it can be extended.
- Default terms: what happens if you miss a capital call — penalties can be severe.
- Sponsor commitment: the manager’s own money in the fund, which SEBI requires.
- Track record: realised exits, not just marked-up valuations of companies still held.
What it costs
- Management fee: typically 1.5% to 2.5% a year, charged on committed capital during the investment period in many closed-ended funds.
- Carried interest: commonly 10% to 20% of profits above a hurdle of roughly 8% to 10%, usually paid only after you have your capital back plus that hurdle.
- Fund expenses: set-up costs, legal, audit, trustee and administration, borne by the fund.
- Our income: a trail commission from the fund, out of the fee it already charges. Nothing extra from you, and disclosed in writing before you commit.
Worked examples of hurdles, catch-ups and high-water marks are in our fees guide.
How long it takes
| Stage | Typical time |
|---|---|
| Conversation and liquidity assessment | 2–4 days |
| Shortlist and PPM review together | 1–2 weeks |
| Subscription documents and KYC | 5–10 working days |
| First capital call | Per the fund’s schedule — weeks to months |
| Distributions | As investments are exited, over the fund’s life |
Funds also have closing dates. If a fund is near its final close, the paperwork window can be short — worth knowing before you start.
What we don’t do
- We never hold your money. Capital goes from your account to the fund.
- We don’t promise returns, and we are wary of anyone presenting private-market marks as though they were realised gains.
- We don’t take upfront commission, and we disclose the trail we receive.
- We don’t recommend an AIF to fill an allocation. If your liquidity cannot support it, the honest answer is no.
Frequently asked questions
What is the minimum investment in an AIF?
₹1 crore per investor under SEBI rules. Employees and directors of the fund or its manager, and investors in angel funds, can invest ₹25 lakh.
Do I have to pay the full ₹1 crore upfront?
Usually not. Category I and II funds take a commitment and draw it down in tranches as opportunities arise, often over two to four years. Category III funds are typically funded in full at the start.
Can I exit an AIF early?
Category I and II funds are closed-ended, so early exit is generally not possible and there is no ready secondary market. Open-ended Category III funds offer periodic redemption, subject to exit loads and notice periods.
How are AIF returns taxed?
Category I and II funds pass income through to you, taxed by its nature, with tax deducted at source on distributions to residents. Category III funds pay tax at the fund level, often at the maximum marginal rate, and distributions are generally not taxed again.
What do I pay IndiaHedgeFunds?
Nothing directly. We receive a trail commission from the fund out of the fee it already charges, and we disclose it in writing before you commit.
Can NRIs invest in AIFs?
Yes, subject to KYC and FEMA requirements, or through USD-denominated funds in GIFT City. See our NRI page for the process.
What happens if I miss a capital call?
Most funds impose penalties set out in the PPM, which can include forfeiting part of your interest in the fund. It is one of the first clauses we read with you.