Introduction
In 2025, India’s wealthy are adjusting their investment strategies. High Net Worth Individuals (HNIs) are shifting their investments beyond fixed deposits and mutual funds, with Alternative Investment Funds (AIFs) emerging as a preferred choice.
This shift is supported by India’s fast-growing pool of wealthy investors. According to the World Wealth Report 2025, India has added more than 33,000 millionaires, for a total of roughly 3.78 lakh HNIs. Collectively, they have an estimated wealth of almost US$1.5 trillion, representing an 8.8% increase within a single year. With the expanding wealth base, High-Net-Worth-Individuals (HNIs) are now looking to invest in alternative investment funds (AIFs) to diversify their portfolios, discover new opportunities, and achieve better returns.
How Big AIF is the Market
- As of March 2025, AIF commitments in India reached about ₹13.49 lakh crore.
- As of mid-2025, approximately 1,550 registered AIFs are in India.
- The AIF industry’s assets under management (AUM) have grown at a strong pace, with a compound annual growth rate of around 28% between FY2019 and FY2024.
Why HNIs Choose AIFs in 2025
- Higher Return Potential vs Mutual Funds
AIFs often invest in illiquid or high-growth sectors. These sectors are not easily accessible via regular mutual funds. For example, private equity or venture capital can generate outsized returns when successful. - Better Diversification
AIFs spread investments across various assets, including unlisted companies, infrastructure, and tangible assets. This reduces dependence on stock market swings. Portfolio diversification is a significant benefit.. - Regulatory & Structural Improvements
SEBI has eased specific rules and lowered entry barriers in some cases. Co-investment options are being allowed. Category definitions and compliance are now more precise. All this makes AIFs more attractive. - HNI Wealth Growth & Appetite for Alternatives
India’s HNI and Ultra-HNI populations are experiencing rapid growth. Investors want more than fixed income and public equity. They are ready for strategies with more complex payoffs, as long as the risk is clear. - Tax Treatment & Minimums
Most AIFs have higher minimum investment thresholds (₹1 crore for many).
Categories I & II AIFs often have “pass-through” status. This means income is taxed in the hands of investors, not at the fund level (outside some exceptions).
Example: In FY25, HNIs invested about ₹74,000 crore into Indian real estate through AIFs. A significant portion of this investment was directed towards warehousing infrastructure, driven by demand from e-commerce, Q-commerce, and sectors requiring logistics and storage.
Risks & Trade-offs
- Illiquidity: Many AIFs are closed-ended. Lock-in periods are long. Exit may not be easy.
- High minimums: Not every investor can participate.
- Fee structure: Usually higher than that of mutual funds. Manager incentives, performance fees, and other factors reduce the net return.
- Risk: Higher potential returns come with higher risks. Many AIFs invest in early-stage, unlisted ventures. Some fail or underperform.
- Apart from structural risks such as long lock-ins, high minimums, and elevated fee structures, AIF investors must also be aware of governance and compliance risks.
Example: Indiabulls AIF case, SEBI found alleged misrepresentation of valuation data and asset pledging issues. The matter was settled for ₹1.43 crore, but it highlighted the risks of opaqueness and regulatory scrutiny in AIFs.
AIF vs PMS vs Mutual Funds
| Features | Mutual Finds | PMS | AIFs |
| Access | Low minimum, open to many | For higher capital investors | Often high minimums, especially Category II/III |
| Asset Types | Listed equities, debt, and hybrids | Customized portfolios in listed securities (stocks, bonds) | Also unlisted, private ventures, infrastructure, and tangible assets |
| Returns | Moderate but stable | Potentially higher, depending on the manager’s skill | High potential returns but with more risk and illiquidity |
| Fees and Taxes | Lower fees; taxes on redemption | Higher fees; frequent tax events | Complex fees, pass-through taxes, or fund-level taxes, depending on the type |
| Diversification | Good across sectors in the listed space | High control in the listed space | Broader diversification; access to niche investments |
What to Watch in 2025
- SEBI reforms for Large Value Funds (LVFs). Proposed reduction in minimum investment limit from ₹70 crore to ₹25 crore. This could make the space more accessible for more HNIs.
- Co-investment frameworks: Investors can invest alongside the fund in specific deals. This gives more control and upside.
- Growing share of domestic investors in AIFs. Confidence from local capital is rising.
Conclusion
At Equentis Investech, Alternative Investment Funds in 2025 represent a strong growth horizon for HNIs. They combine higher return potential, diversified exposure, and improved regulatory clarity. But they also come with risk, longer lock-ins, and higher fees.
For HNIs seeking to diversify beyond traditional routes, AIFs can be a crucial component of portfolio design. We recommend balancing your portfolio by using mutual funds or PMS for more liquid core holdings and allocating a portion to well-selected AIFs for alpha and diversification.
At Equentis Investech, we can help you evaluate AIF options, understand the risk versus reward, select funds that match your goals, and structure a portfolio that captures performance while managing downside risk.
