Can I exit an AIF early if I need the money?

Generally no. Category I and Category II AIFs must be close-ended with a minimum tenure of three years, and in practice run seven to ten. There is no redemption window. Units may be transferable in principle but there is no functioning secondary market for most Indian AIF units, so assume the capital is committed for the full tenure.

What happens if I cannot meet a capital call?

You commit an amount at the start and the manager draws it down over the fund's life, usually on short notice. Failing to fund a drawdown makes you a defaulting investor, and the consequences are set out in the fund's contribution agreement — commonly forfeiture of some or all of your existing interest. Read that clause before committing, not after.

How risky is an AIF compared with a mutual fund?

Materially riskier on every axis that matters. A mutual fund publishes a daily NAV, allows redemption, is diversified by regulation and is comparable against peers. An AIF may hold unlisted assets valued periodically, locks capital for years, may concentrate up to 25% in a single company, and publishes no performance data anyone outside the fund can check.

AIF risks — what can actually go wrong, and what SEBI registration does not protect you from

Q: Does SEBI registration mean an AIF is safe?

No. SEBI registration is a fact about a filing, not an endorsement, a rating or a recommendation. It confirms the fund is registered under the SEBI (Alternative Investment Funds) Regulations, 2012 and is subject to their disclosure and conduct requirements. It says nothing about the quality of the strategy, the skill of the manager or the likelihood of a return.

Is an AIF safe, and what are the risks?

An AIF carries no capital protection and no guaranteed return. The specific risks are illiquidity across a lock-in of three years or more, blind-pool risk where investments are not known at commitment, concentration of up to 25% of the fund in one company, obligation to meet capital calls on notice, and the absence of any public source that lets you verify a manager's past performance.

Start here

An Alternative Investment Fund is a legitimate, regulated, and for some investors appropriate instrument. It is also structurally riskier than anything most Indian investors have held before, and the risks are not the ones people usually ask about.

The common question is "what returns do AIFs give". That question has no answerable form, which is itself the first thing worth understanding.

1. You cannot verify the track record

This is the risk that sits underneath all the others.

AIF performance is not publicly disclosed. There is no Indian equivalent, for AIFs, of the monthly performance reporting that APMI requires of portfolio management services. Per-fund returns, NAV and IRR live in the private placement memorandum and in investor reports, and neither is public.

What follows from that is uncomfortable and worth saying directly. When a distributor shows you a manager's past returns, you are looking at a number prepared by the interested party, on a basis you cannot inspect, that no independent source can confirm. It may well be accurate. You have no way to establish that it is.

The one genuinely independent reference point is the aggregate, category-level benchmark published by SEBI's mandated benchmarking agencies, NSE Indices and CRISIL, computed post-expense, pre-carry and pre-tax. It tells you how a category performed. It cannot tell you how a fund performed.

What to do about it. Ask for the audited numbers, the valuation policy, and who did the valuation. Ask which prior funds are fully realised and which are still marked at the manager's own estimate. An unrealised return is an opinion.

2. Illiquidity is total, not partial

Category I and Category II AIFs must be close-ended with a minimum tenure of three years, and typically run seven to ten. There is no redemption window. There is no functioning secondary market for Indian AIF units.

Money committed to an AIF should be money you have no plan for, across a horizon longer than most people's forecast of their own circumstances.

3. Blind-pool risk

For most Category I and II funds you commit capital before knowing what it will buy. The memorandum describes a strategy and a mandate, not a portfolio. You are underwriting a manager's future judgement, not a set of assets you have examined.

That is the nature of the product. It is not a defect. But it means diligence has to be done on the people and the process, because the holdings do not exist yet.

4. Capital calls are an obligation, not an option

You commit an amount. The manager draws it down over the fund's life, on notice. Your ₹1 crore commitment is not ₹1 crore paid on day one — it is ₹1 crore you must be able to produce across several years, at times you do not control.

Failing to fund a drawdown makes you a defaulting investor. The consequences sit in the contribution agreement and commonly include forfeiture of part or all of your existing interest. Read that clause before signing.

5. Concentration is permitted, and larger than you expect

Under the AIF Regulations, a Category I or Category II AIF may invest up to 25% of its investable funds in a single investee company. Category III is capped at 10%.

A quarter of a fund in one company is a legitimate strategy. It is also a concentration no diversified mutual fund could take. If two positions go wrong in a fund holding eight, the fund is in trouble, and you cannot exit.

6. Category III adds leverage

Category III AIFs may use leverage and complex derivative strategies. Leverage magnifies both directions. A Category III fund can lose money in a market where a long-only fund merely underperforms.

Category III is also taxed at the fund level rather than passed through, unlike Categories I and II, where income is taxed in the investor's hands. That changes the after-tax arithmetic of the same gross return, and it is the single most commonly misunderstood point about Category III.

The governing provision is Section 224 of the Income-tax Act, 2025, which replaced Section 115UB of the 1961 Act when the new Act came into force on 1 April 2026. Section 224(10)(a) defines an "investment fund" as a Category I or Category II AIF, so Category III sits outside the section entirely. See AIF taxation. Take advice on your own facts before committing.

7. Valuation is periodic and partly judgemental

An unlisted holding has no market price. Its carrying value is a valuation, made on a policy, at intervals. Between valuations you do not know what your holding is worth, and at a valuation you know what a valuer concluded.

This is unavoidable in private markets. The risk is not that valuation exists, it is treating a marked value as though it were a realised one.

8. Fees compound against you across a long tenure

Management fee, distribution commission, performance fee or carry above a hurdle, setup costs, and the fund's own operating expenses. Across a seven-year tenure these are not a rounding error on the gross return.

Ask for the total expense picture in writing, including how carry is calculated, whether there is a catch-up, and whether the hurdle is hard or soft.

What SEBI registration does and does not mean

SEBI registration is a fact about a filing. It means the fund is registered under the SEBI (Alternative Investment Funds) Regulations, 2012 and is subject to their conduct, disclosure and reporting requirements.

It is not an endorsement, a rating, a recommendation, or a view on the strategy or the manager. Every SEBI-registered scheme document carries a disclaimer to that effect, and the GARUDA circular of 30 July 2026 restates it in prescribed words: submission of a placement memorandum to SEBI "should not in any way be deemed or construed that the same has been approved by SEBI".

What registration does give you is real, and it is worth using. It gives you a verifiable identity: a registration number, a category, a date, a registered office, a sponsor and a manager, all on the public register. Start there. Our directory reproduces it.

The questions worth asking before you commit

Which prior funds are fully realised, and what did they actually return in cash?
Who performs the valuation, on what policy, and how often?
What is the total fee load across the tenure, carry included?
What are the default consequences if I miss a drawdown?
What is the concentration limit the fund has set itself, as against the regulatory maximum?
Who is the merchant banker that certified the placement memorandum, and are they unaffiliated with the manager?
What happens at the end of tenure if the portfolio is not realised?

AIF vs PMS — why one is comparable and the other is not
AIF vs SIF — the listed, ₹10 lakh, published-NAV alternative
AIF minimum investment
AIF fees and costs — what you pay across the tenure
SEBI's GARUDA mechanism — who certifies the memorandum now
The SEBI register — what you can actually verify, reproduced from SEBI's own list

Information only. Not investment advice, not an offer, and not a recommendation.

Checked against source on 24 August 2026. This page is information, not legal, tax or investment advice.

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