Wealth First Explains the structure, purpose, and regulatory framework behind India’s alternative investment vehicles
There’s a quiet truth about India’s investment landscape: not every investor needs the same vehicle. For most people, the “main roads” are enough – bank deposits, mutual funds, listed equities, bonds. But for many HNIs, family offices, institutions, and experienced investors, the requirement often looks different:
- backing a young business before it becomes a household name,
- funding a long-gestation infrastructure project,
- investing with a clear social impact lens,
- or using more complex strategies that don’t fit neatly into traditional products.
That’s where SEBI’s broader toolbox comes in, frameworks that are meant for larger-ticket, more sophisticated participation, with clear rules and guardrails. One such framework is the Alternative Investment Fund (AIF).
So, what is an AIF?
SEBI defines an AIF as a privately pooled investment vehicle, a set up in India as a trust, company, LLP, or body corporate, that collects money from investors and invests it as per a defined investment policy, for the benefit of those investors.
Two small but important clarifications straight from the regulation’s framing:
- It’s “private pooling” meaning it is not built like a mass retail product.
- It is not a mutual fund or a collective investment scheme under those respective SEBI regulations, i.e., there is clear distinction of AIF from those frameworks.
A simple example
Imagine 12 sophisticated investors who want exposure to unlisted opportunities, say, early-stage companies, or specialised credit, or an infrastructure theme. Instead of each investor individually hunting for deals, conducting paperwork, negotiating terms, tracking compliance, and managing exits, they pool their money into a single structured vehicle.
- They appoint a manager who acts as a professional entity running the fund.
- The fund issues units to each investor, representing their proportionate interest.
- The fund invests as per a stated strategy and documented investment policy.
This pooling is the “alternative” part: the underlying strategy and assets may not be the typical retail-market basket.
What an AIF is not (important clarity)
SEBI’s regulation also lists certain pools/structures that should not be treated as AIFs for this purpose; examples include certain family trusts for relatives, ESOP trusts, employee welfare/gratuity trusts, and certain pools directly regulated by other Indian regulators, among others. The point is simple: not every pool of money becomes an AIF; it becomes an AIF only if it fits SEBI’s definition under this framework.
Key features of AIFs
1) Private, not public
AIFs are meant to be privately pooled and operate through a defined structure, not mass marketed as “one product for everyone.” This is reflected both in the definition and the eligibility/registration architecture.
2) A recognised legal structure
An AIF is established in India as a trust / company / LLP / body corporate. This matters because sophisticated investing needs a well-defined legal structure.
3) SEBI registration is central
From the regulation’s perspective, you cannot act as an AIF without obtaining a certificate of registration from SEBI (subject to specified transitional provisions).
4) AIFs operate around a stated strategy
AIFs are built around a stated strategy, meaning the fund must clearly document what it is trying to do, how it plans to do it, and what it will not do. This is typically captured in the fund’s core disclosure document (often referred to as the placement memorandum). In simple terms, an investor shouldn’t have to ‘guess’ the fund’s game plan.
What this “plan” typically covers
- Purpose: Why the fund exists and what it is trying to achieve.
- Where it will invest: The types of assets or opportunities it is allowed to invest in.
- How decisions will be taken: The broad method the fund uses to choose investments.
- What limits it will follow: What the fund will avoid, and what internal limits it will keep in mind.
- Expected holding period and exit approach: How long investments may be held and how the fund may look to exit.
- If the plan changes: The process the fund must follow if it wants to make a major change to its stated approach.
Why this matters?
AIFs are not “one standard product.” Each fund can be built differently. A clearly stated plan helps investors understand what they are signing up for, what kind of ups and downs may come with it, and whether it suits their own time horizon and comfort level.
5) Defined roles and accountability
The framework defines key roles such as the Sponsor, Manager, Trustee (where the AIF is set up as a trust), Custodian, and the fund’s Principal Officer / Key Management Personnel responsible for oversight and execution. because with private pools, responsibility must be identifiable.
Why this matters for an HNI
For a high-net-worth investor, the core value of the AIF framework is not “returns” (since nobody can promise those). The value is:
- access to strategies that don’t fit in traditional investment products,
- professional management and governance structures,
- and a regulatory framework that demands documentation, role clarity, and registration.
So far, we’ve understood AIF as a SEBI-recognised private pool with a defined structure, documented strategy, and a registration framework. But AIF is not one single style of investing.
SEBI breaks it into categories based on what the fund is intended to do (and how it behaves, especially around leverage, trading complexity, and the kind of underlying assets). That categorisation is where the real depth begins, which is what we’ll discuss in detail in the next part.