Why Are AIFs Gaining Popularity Among HNIs & NRIs?

In today’s world, traditional investments are not enough to achieve higher returns in the market; you need new investment instruments that can generate strong alpha and provide portfolio diversification. In 2012, SEBI introduced Alternative Investment Funds (AIFs). 

AIF has 3 categories:

• Category 1 - These funds invest in early-stage companies or startups as equity or debt. These funds also invest in infrastructure-based projects and Social Ventures. It’s the Venture Capital Category.

• Category 2 - These funds invest in equity or debt in mid- or late-stage companies that have proven themselves to be established market players. These types of funds, also known as Private Equity & Debt Funds, and REITs, are also a part of this category, where they provide institutional-grade exposure to commercial and residential projects.

• Category 3 - This category is referred to as India's Hedge Funds. Generally, they invest/trade in shares using leverage, derivatives, short-selling, and other strategies to generate returns from all market situations. This category includes Long-Short Equity funds, Arbitrage funds, and Quant funds that use data-driven systematic investing.

As of late 2025, the commitments of AIF in India have grown more than 100% from ₹6. 41 Lakh Cr in FY22 to ₹15.74 lakh Cr in FY25. This growth isn't restricted to commitments only; actual investments deployed increase to ₹5.72 Lakh Cr in FY25. This reflects that private capital goes into the productive sector of the economy, signaling efficient capital utilization in the investment ecosystem. The growth of AIFs in India outperformed the other investment classes like mutual funds and bank deposits, with 30% CAGR (from 2019 to 25).

Since 2020, AIFs 20% CAGR outperformed every other asset class with less than 15% CAGR. This is also the primary reason and growing trend in HNIs & NRIs for investing in AIFs.

There are many reasons why HNIs & NRIs go into AIFs.

Diversification  

Most investors are related to the public market. AIF opens opportunities that are not listed on NSE or BSE.

• It invests in companies that are not in the stock market, even if they are on paper.

• If you don't want equity, then give credit to Mid-sized companies and get a 12-18% yield.

• Gets diversification on investment strategy like Long-Short Strategies & Arbitrage

• Professional Managers perform due diligence that individual HNIs can't do

Startups & Companies 

India has the 3rd highest number of Startups and Unicorns (valuation $1 Billion) in the world. The primary source of capital for early-stage companies is PE-VC firms, which give funding in return for equity, and this allows investors to participate in unlisted companies. This phenomenon can build some of the great companies and grow businesses much faster. 

While traditionally investors can’t invest like this, AIFs give them a platform and tremendous return in “times” on their capital. 

GIFT City 

The recent participation of NRIs in AIFs is due to Gujarat International Finance Tec-City (GIFT City). It gives them a "currency shield," meaning investment amounts and returns are not eroded due to INR depreciation. If someone is investing $100,000 in a GIFT City AIF means their capital stays in dollars.

Also getting tax incentives, the government wants to build GIFT City as an alternative to Singapore or Mauritius.

AIFs are the greatest investment vehicle, not only for HNIs or NRIs but also for the country, as it allows GDP to grow faster. To achieve the target by 2050 to become a $40 trillion economy, India needs more capital in AIFs.

For investors, they get diversification on their capital, where traditionally they can’t, which gives them exposure to invest in India’s startup ecosystem and build great companies from India to the world. But unlike any other ride, this industry is relatively young, there could be some kind of risk along the way, and therefore, investors must choose AIFs wisely.