Introduction
Diversifying your portfolio isn’t just about spreading money; it’s about choosing the right investment vehicle. For retail investors, Mutual Funds offer flexibility and easy access. For HNIs, AIFs provide opportunities in private equity, real estate, and niche strategies. AIFs vs Mutual Funds: Which one truly delivers better diversification and growth? In this blog, we break it down for your investment journey.
What are AIFs and Mutual Funds?
- Mutual Funds pool money from many investors. They invest in stocks, bonds, or debt instruments. They are regulated tightly by SEBI.
- AIFs (Alternative Investment Funds) also pool money. However, they invest in non-traditional assets, including unlisted companies, credit, and real estate, and sometimes employ complex strategies. SEBI classifies AIFs into Category I, II & III.
Key Differences AIFs vs Mutual Funds That Affect Diversification
Data on Growth & Scale
- AIFs have grown fast. From September 2019 to September 2024, the AIF size rose from approximately ₹3.17 lakh crore to ₹12.43 lakh crore. That’s a CAGR 31%.
- During the same period, the assets of Mutual Funds grew from ₹22.68 lakh crore to ₹67.73 lakh crore. CAGR 25%.
It indicates that demand for alternative investment funds is increasing at a faster rate. More investors want diversification beyond just stocks & debt.
Returns
- Some Category II AIFs (debt & credit funds) are delivering over 10% monthly/annual returns. For instance, in August 2024, many Category II debt AIFs delivered returns of more than 10%.
- Mutual funds, especially equity ones, have delivered impressive long-term numbers. For instance, certain top equity mutual funds in India have delivered a CAGR of 30% or more over 3-5 years. But such high returns tend to belong to select funds & depend on market cycle.
- However, AIFs’ returns often come with higher risk, longer lock-in, and lower liquidity. One high-return AIF scheme might outperform for a few years. Yet, in a down market, it may lose more.
Taxation
- AIFs:
• Categories I & II are pass-through entities. The investor pays tax on earnings even if the fund hasn’t distributed them.
• Category III AIFs are taxed at the fund level. They often fall under business income tax. Tax rates may include a high surcharge (up to 42.7%) depending on the type of earnings. - Mutual Funds:
• You pay tax when you redeem or when the mutual fund distributes dividends (if applicable). Long-term capital gains (equity funds) have favourable rates.
• Short-term gains taxed at slab or applicable + STT. - Conclusion on taxes: Mutual funds are often more tax-efficient for small/retail investors. AIFs may pay heavy taxes, especially if you are investing via Category III or earning business income.
Risk & Diversification with Examples
- A mutual fund that invests broadly in 30-50 stocks across various sectors provides industry diversification. If one sector crashes, others may cushion losses.
- An AIF may concentrate in just one sector (such as real estate or unlisted technology). If that sector underperforms, you lose more. But if it does well, you gain more.
The SEBI rules for Alternative Investment Funds (Regulations, 2012) set strict norms, including a minimum corpus, limits on the number of investors, and investor protection norms. - Example: A Category II debt‐AIF (credit fund) delivered nearly 12.5% in some months (August 2024) vs. the Nifty50 gain of 1.1% in the same period. Great if you timed correctly.
What is best for you?
It depends on your profile:
- If you are a retail investor seeking liquidity, lower risk, and good diversification, mutual funds are often a safer option.
- If you are a high-net-worth investor (HNWI) willing to take a lock-in, want higher risk & return, and can bear complexity, AIFs could make sense.
Use a mix. Don’t bet all on one. You may put, say, 70% in mutual funds for base, 20% in AIFs for alpha, and 10% in other strategies.
Why Choose Equentis Investech?
At Equentis Investech, we guide investors through these choices:
- Analyse fund performance with real data.
- Help map your risk appetite.
- Suggest a portfolio mix with proper diversification (Mutual Funds + AIFs + others).
- Ensure transparency. We clearly explain fees, lock-ins, and taxes.
If you want a portfolio that balances growth, risk, and freedom, we can help you design it. Let’s build your diversified portfolio together.
If you seek expert advice, clarity, and data-driven strategy, Equentis Investech offers that. We help ensure that “which is better” becomes “better for you.”
