Introduction
Are you aware that AIFs (Alternative Investment Funds) now have net assets under management of over ₹13.5 lakh crore in India 2025? Once considered niche, AIFs have emerged as a mainstream option for HNIs, Ultra-HNIs, and institutions that want diversification beyond traditional equity and debt. However, as SEBI regulations evolve rapidly, we keep track of the changes that may directly affect your returns.
This blog breaks down the key regulatory changes shaping AIFs in India, what they mean for investors, and how to stay ahead in a changing landscape.
The Introduction of the AIF Framework
The Securities and Exchange Board of India, or SEBI, in 2012 came out with the Alternative Investment Fund Regulations that first gave a structure to fund management by classifying AIFs into three categories:
- Category I AIFs: Positive social/economic impact investments, such as startups, SMEs, and infrastructure.
- Category II AIFs: Private equity, debt funds, and distressed assets funds that provide no specific government incentive.
- Category III AIFs: Hedge funds and complex trading strategies involving leverage.
This classification provides clarity to investors and establishes a relationship between funds and their corresponding risk-return profiles. For example, the rapid rise of venture capital funds investing in India AI and fintech startups falls into Category I. Whereas, significant private equity investments in renewable energy projects will often fall into Category II.
Expanded Disclosure & Reporting Requirements
To enhance transparency, SEBI requires detailed disclosures from AIFs with respect to:
- Investment strategy: Clear articulation of the sectors, asset classes, and approach the fund will follow, helping investors align with their own goals.
- Risks: Comprehensive risk disclosures, including market, liquidity, and regulatory risks, to ensure investors are aware of potential downsides.
- Costs: Transparent breakdown of management fees, performance fees, and other charges so investors can assess true cost-to-return.
- Performance: Periodic reporting of NAVs, IRRs, and benchmarks, enabling investors to track fund outcomes against stated objectives.
Investment Protection Growing
Investor protection is still a primary regulatory goal. Recent changes include:
- Independent valuation agencies provide fair pricing for assets.
- Grievance redressal portal for investor complaints.
- Compliance with related party transactions.
Most recently, there was the 2024 SEBI circular, which required independent audits of AIF investment valuations to prevent inflated NAV reporting, a practice accepted by global institutional investors, particularly in India.
Changes in Taxation for AIFs
Taxation has remained one of the evolving elements of AIF investments. Some of the significant changes include:
- Pass-through taxation for Category I and II AIFs, which allows income to be taxed only in the hands of the investor.
- Taxation at the fund level still applies to Category III AIFs and can potentially diminish post-tax returns.
- During the presentation of the Union Budget 2024, the capital gains treatment of unlisted securities was clarified, which should come as welcome news for investors in startup-focused funds.
- Investors in AIFs should consult with tax advisors to develop a tax-efficient portfolio and structure when investing in multiple AIF categories.
Effects of Recent Economic & Policy Initiatives
Government initiatives such as Startup India, Make in India, and Gati Shakti create a conducive environment for AIFs. For example:
- Category I AIFs are deploying capital into green energy startups, and investment in EV infrastructure can take advantage of favourable policies available to such investments.
- Category II AIFs are capitalising on the development of the Indian private credit market, which is projected to exceed $100 billion by 2030.
These policy-related opportunities underscore the importance of regulation in achieving maximum returns.
Factors to Consider for Investors
Before making an AIF Investment, keep in mind the following:
- Stay Informed – Review all SEBI announcements and use one of the many financial advisory services that exist.
- Do Your Own Research – Look at fund manager backgrounds/history of compliance with regulatory bodies.
- Understand Your Risk Tolerance – Ensure the category of fund aligns with your risk-return profile.
- Seek Professional Advice – Consider using a wealth manager or legal advisor.
Why Equentis Investech?
The AIF market in India, although it is maturing and expanding quickly, requires an understanding of regulatory changes to enable informed and conducive investment decisions. If investors can grasp SEBI’s latest reforms, tax policies, and economic incentives for the AIF, they can make better-informed decisions regarding their wealth-building.
At Equentis Investech, we offer meaningful insights on unlisted shares. Whether you’re exploring PRE-IPO liquidity, navigating AIF taxation, or building a diversified alternative portfolio, we help you make smarter investment decisions with confidence.
