What are alternative investment funds (AIFs) and how do they work?
If one has built a robust portfolio across equities and bonds and is seeking additional diversification, AIFs are worth understanding and considering.
A 2025 HSBC survey (PDF) of more than 10,000 investors with between USD100,000 and USD2 million in assets found they doubled their yearly allocations to alternative assets and gold. Why? Investors want to spread risk and increase potential returns beyond traditional assets.
This guide explains what an AIF is, outlines the process for investing in AIFs, and summarises the key elements of India’s regulatory framework.
What is an alternative investment fund (AIF)?
AIFs are investment funds focused on assets that aren't available through public markets or stock exchanges. They're best suited to experienced investors who are comfortable taking on some risk in exchange for higher potential rewards.
In India, the Securities and Exchange Board of India (SEBI) regulates AIFs under rules introduced in 2012.
What are the benefits of investing in an AIF?
AIFs can help diversify a portfolio beyond traditional investments. They can give investors access to specialist strategies and opportunities that are harder to reach, such as private markets, real assets, and structured credit.
Other key benefits include:
-
Access to exclusive investments: AIFs let you invest in private equity, venture capital, hedge funds and property. You can't access these through everyday investment products.
-
Potential for higher returns: Because AIFs invest in less common assets, they can grow your money in ways that don't rise and fall with the public markets.
-
Steadier results: A well-balanced AIF portfolio can soften the ups and downs, especially when the economy feels uncertain or prices are rising fast.
-
Expert management: Your capital is managed by experienced fund managers with specialist knowledge of complex investments.
We're seeing a clear shift among affluent investors who want peace of mind as well as performance: more are turning to managed solutions as the foundational block of their portfolios, and to alternatives to access less traditional spaces.[@article-inv-snapshot2025] – Nicolas Moreau, CEO, Asset Management, HSBC
What are the types of alternative investments?
SEBI classifies AIFs into 3 categories, based on their investment strategies and objectives:
Category I
Funds that invest in start-ups, early-stage ventures, social ventures, small and medium enterprises, or infrastructure.
Category II
Funds that invest in private equity, debt or real estate. These don't receive any specific incentives or concessions, but they don't use leverage beyond day-to-day operational needs.
Category III
High-risk, high-return investments that use advanced trading strategies to maximise returns. They can buy both public and private assets. Hedge funds typically fall into this category.
How do AIFs compare to mutual funds?
AIFs and mutual funds serve different investor profiles. Here's how they differ:
| Features | AIFs | Mutual funds |
|---|---|---|
| Minimum investment | INR10 million (approximately USD100,000) | Open to all investors |
| Target investor | High-net-worth individuals | Everyday investors |
| Asset types | Private equity, property, and other non-public assets | Publicly traded shares and bonds |
| Lock-in period | Typically 3 years or more | Usually redeemable anytime |
| Features | Minimum investment | Minimum investment |
|---|---|---|
| AIFs | INR10 million (approximately USD100,000) | INR10 million (approximately USD100,000) |
| Mutual funds | Open to all investors | Open to all investors |
| Features | Target investor | Target investor |
| AIFs | High-net-worth individuals | High-net-worth individuals |
| Mutual funds | Everyday investors | Everyday investors |
| Features | Asset types | Asset types |
| AIFs | Private equity, property, and other non-public assets | Private equity, property, and other non-public assets |
| Mutual funds | Publicly traded shares and bonds | Publicly traded shares and bonds |
| Features | Lock-in period | Lock-in period |
| AIFs | Typically 3 years or more | Typically 3 years or more |
| Mutual funds | Usually redeemable anytime | Usually redeemable anytime |
In Why AIFs are the future, a Navigate with HSBC episode, Aashish Somaiyaa, Executive Director and CEO of WhiteOak Asset Management, explained the difference: "The best part about AIFs is the ability to give exposure to segments which a mutual fund, being a mass retail vehicle, just cannot do."
Case study: Diversifying beyond mutual funds
Rajesh is an investor based in Mumbai. He built his wealth through mutual funds. While reviewing his portfolio, he considered a range of alternatives that may give him exposure to unlisted Indian companies, including Category II AIFs with private equity strategies. He was aware that these options come with a longer time horizon and lower liquidity. With that in mind, he explored private equity alongside his traditional funds.
How to invest in AIFs in India
Investing in an AIF takes planning and a bigger starting amount. The usual AIF minimum investment is INR10 million (USD100,000).
Any Indian citizen, non-resident Indian (NRI) or foreign national can invest, as long as they meet the eligibility criteria. You can also apply as joint investors with close family members, such as a spouse, parent or child.
Here's how it works:
-
Assess your eligibility and risk appetiteCheck that you meet the minimum investment requirement and understand the risk-return profile.
-
Choose the right AIF categorySelect Category I, II or III based on your financial goals and risk tolerance.
-
Evaluate the fund managerReview their track record, investment strategy, risk management and governance standards.
-
Complete the paperworkComplete identity checks (known as Know Your Customer, or KYC), sign the legal agreements, and finish the onboarding steps.
-
Commit your capitalMost AIFs ask for a capital commitment rather than a single lump-sum payment upfront.
Case study: Reducing volatility through real estate AIFs
Priya is a high-net-worth investor. Most of her portfolio was invested in listed equities. When public markets fell, the value of her portfolio fell too. To diversify, she moved part of her assets into a Category II real estate AIF focused on commercial properties.
The investment had a lock-in period and gave her exposure to unlisted/private assets. These assets aren't usually repriced each day in response to short-term public market sentiment. The fund aimed to generate rental income or distributed income during the period. It helped Priya diversify her return sources and rely less on equity returns.
How are alternative investment funds taxed?
To understand the taxation of alternative investment funds, you need to look at your specific AIF category. Tax rules can be complex and depend on your personal circumstances. Always speak with a qualified tax and financial advisor before making investment decisions.
Category I and Category II
These AIFs get 'pass-through' status. The fund doesn't pay tax on most gains, except business income. Instead, you pay tax on your share of the profits.
Category III
These funds pay tax themselves before passing gains to you. This means you usually won't have any extra tax to pay on what you receive.
What are the key considerations and risks?
Alternative investment funds can offer strong returns, but they come with important trade-offs.
-
Your money is locked inYou can't take your cash out easily for several years.
-
Some funds take larger risksFunds that put money into start-ups or use complex plans can be much riskier.
-
Costs and fees will varyYou need to know exactly what you're paying and how the fund handles risk.
-
Transparency is limitedAIFs don't have to share as much detail as mutual funds, so you'll rely on your fund manager for updates.
Note: This guide covers the regulatory and investment framework for AIFs in India, as governed by SEBI. If you're investing from outside India, speak with your HSBC Relationship Manager about the rules that apply to you.
How to get started
To invest in an AIF, you'll need to meet SEBI's eligibility requirements, including a minimum investment of INR10 million. Your eligibility will also depend on your country of residence and the products which are on our referral offering basket.
Ready to take the next step? Speak to your HSBC Relationship Manager to check the AIFs that are available on a referral basis.
Frequently asked questions
What is the minimum investment required for AIFs in India?
The minimum investment is INR10 million per investor, as mandated by SEBI.
How are AIFs taxed in India?
Category I and II pass gains to investors, who pay tax based on their share. Category III pays tax at the fund level, so investors don't get an extra tax bill.
How long is my money locked in an AIF?
Most AIFs have a lock-in period and tenure of 7 to 10 years.
Can non-resident Indians (NRIs) invest in an AIF?
Yes, NRIs can invest if they follow all rules under the Foreign Exchange Management Act and complete Know Your Customer (KYC) steps.
Do AIFs guarantee positive returns?
No. AIFs don't guarantee gains. They aim to manage risk and diversify your portfolio, but results depend on the fund manager's choices and market conditions. Investments can increase or decrease in value, and you might not get back the amount you initially invested.
HSBC Premier
Our premium bank account, combining wealth and international banking expertise with a host of exclusive health and travel benefits.
Did you find this article useful?
You might also be interested in
Important notes
Disclaimer:
The case study presented in this blog post is for illustrative purposes only. The name, character, and personal details of the individual referred to herein are entirely fictional and do not represent any real person, living or deceased. Any resemblance to actual individuals is purely coincidental and unintentional.
This content is sponsored by The Hongkong and Shanghai Banking Corporation Limited, India (HSBC India) and is published for informational and educational purposes only. It does not constitute an offer, solicitation, or recommendation to buy or sell any financial product or service. The information contained in this blog post is of a general nature and is not intended to constitute financial, legal, tax, or investment advice. Readers should not act upon the information provided without first seeking independent professional advice tailored to their specific circumstances. HSBC India does not accept any liability for any loss or damage arising directly or indirectly from the use of, or reliance on, the information presented in this blog post.
HSBC India is not liable for any informational errors, incompleteness, delays, or for any actions taken in reliance on information contained herein. All products are subject to availability. HSBC India does not provide any tax advisory services.
HSBC India is an AMFI-registered Mutual Fund Distributor and an AMFI-registered Specialized Investment Fund (SIF) Distributor. HSBC India distributes select mutual fund schemes and SIF strategies of empanelled Asset Management Companies, and acts as a referrer of other third-party investment products.
HSBC India currently refers investment products from third party entities registered and regulated in India. HSBC does not offer through referral, investment products to those persons who are either the citizens or residents of United States of America (USA), Canada or any other jurisdiction where such referral would be contrary to law or regulation.
HSBC India only refers its clients to the third-party product provider for fulfilment of clients needs. The decision to offer AIF to clients will be taken independently by the third-party product provider. Please read the AIF Disclosure Document, other offering documents and the terms and conditions of the AIF product and client should proceed to invest only if the client agrees to the same. HSBC India shall not be responsible for any decisions of the third-party product provider and all concerns/disputes with regard to AIF should be directed by the client to the third-party product provider.