India has a diversified financial sector undergoing rapid expansion, both in terms of strong growth of existing financial services firms and new entities entering the market.

The Indian regulators have been introducing rules relating to newer fund based on pooling entities such as alternative investment fund (AIF), real estate investment trust (REIT), infrastructure investment fund (InvIT), etc. This has led to high growth in the Indian asset management industry, which is one of the fastest growing in the world.

The Securities and Exchange Board of India (Sebi), the regulator of asset management industry in India, regulates domestic investment funds such as mutual funds, AIFs, REITs and InvITs. Whereas offshore funds (investment funds set up outside India that invest in Indian securities or domestic funds) are regulated as foreign portfolio investors (FPI) and foreign venture capital investor (FVCI). Some of the key features of these pooled fund investment structures are as below:

Alternative investment fund

AIFs are investment funds that mobilize pool of capital from sophisticated investors for investing in accordance with a defined investment policy for the benefit of its investors. AIFs can be registered under any of the following three categories:

• Category I includes social venture funds, small and medium-sized enterprise (SME) funds, infrastructure funds, venture capital funds and angel funds;

• Category II includes AIFs that do not fall under Category I or Category III—these include private equity and debt funds; and

• Category III includes AIFs that employ diverse or complex trading strategies and may employ leverage including through investment in listed and unlisted derivatives.

The AIF regulation places no restriction on the type of investors that can invest in AIF schemes as long as the issuance is through private placements.

According to Sebi regulations, AIF may raise funds from any investor whether Indian, foreign or non-resident Indians by way of issue of units. Each scheme of an AIF must have a corpus of at least Rs20 crore (i.e. approx. $3 million).

AIFs are becoming the vehicles of choice as the structure can be customized to suit diverse investment strategies, sector exposure or target asset classes.

Growth in the alternative investment market in India has been spectacular as institutional and high net worth individual (HNI) investors have continued to invest into AIFs over the past few years. This is evident from the fact that there are 395 AIFs already registered with Sebi.

Mutual funds

Mutual Funds are professionally managed investment schemes where money from several investors is pooled by an asset management company (AMC) and invested into different instruments such as debt, equity and money market securities. The resulting profit, after deductions of charges by AMC, is returned to investors as dividends or capital appreciation, according to the terms and conditions of such Mutual fund.

In general, the mutual funds industry in India operates in the retail segment (with limited exception for private placement for specified types of schemes) by raising money from public through the sale of units under schemes set up from time to time. As for the market players, there are 45 mutual funds already registered with Sebi and each having various schemes launched with different investment objectives.

REITs and InvITs

REITs and InvITs are relatively new investment vehicles that pool money from investors and invest in realty and infrastructure assets, respectively, directly or through a special-purpose vehicle (SPV).

These are similar to mutual funds, and investors can aim for dividends and capital appreciation. These instruments distribute income from rentals, tolls and property/infrastructure assets as dividend, and the net asset value of the units goes up when the property appreciates in value. REITs and InvITs being emerging concepts there are very few InvITs and REITs in India.


Under the FPI route, a person resident outside India can invest in Indian securities, mainly listed equity shares, debt instruments issued by Indian companies and government securities. According to the regulatory regime, investment by a foreign portfolio investor cannot exceed 10% of the paid up capital of the Indian company. The maximum permissible investment in the shares of an Indian company, jointly by all FPIs together is 24% of the paid-up capital of the company. According to SEBI regulations, FPIs are not allowed to invest in unlisted shares and investment in unlisted entities is treated as FDI. India witnesses a considerable quantum of foreign investment from FPIs. The wide basket of securities in which FPIs can invest in, coupled with ease in the regulatory framework, has made the FPI route a suitable mode of foreign investment in India. Presently, there are approximately 9,256 FPIs registered with Sebi.

Foreign venture capital investor

FVCI is the entity setup outside India which invests into venture capital undertaking (VCU) or in domestic funds that invest in VCUs. This is specialized regime for venture capital and private equity investors and it enjoys certain advantages while making investments in a VCU or exiting therefrom. However, investment by FVCI is permitted only in the sectors prescribed by the Reserve Bank of India.

The Indian asset management industry has registered a strong growth, driven by robust capital markets and record equity inflows. The International Monetary Fund (IMF) has estimated that India will be one of the fastest-growing economies in the world in the coming years. From investors point of view, given that India offers a stable democracy, robust GDP growth, relatively stable currency and supportive regulatory policies, investors—both domestic and foreign, are keen to invest in India. Such investors could consider to invest in India through one or more investment routes discussed above and reap benefits by participating in the growth journey of one of the fastest growing large economies in the world.


Frequently Asked Questions

1) How can a non-resident Indian (NRI) invest in Indian securities?

An NRI is a person resident outside India, who is a citizen of India or is a person of Indian origin. NRIs can invest in shares of Indian company through a stock exchange, under Portfolio Investment Scheme (PIS). Also, NRIs can invest in domestic investment funds such as mutual funds, AIFs, REITs and InvITs.

2) Whether foreign portfolio investors (FPIs) are permitted to invest in domestic investment funds (such as mutual funds, AIFs, REITs and InvITs)?

FPIs are permitted to invest in domestic investments funds such as mutual funds, REITs, InvITs and certain category of AIFs.

3) What is the process for the overseas investor to repatriate funds from India to its home country?

Foreign capital invested in India is generally allowed to be repatriated along with the income earned in India after payment of necessary taxes, subject to prescribed conditions. The banker remitting funds outside India is obligated to ensure that taxes due on the income earned is duly discharged in India by the overseas investor. For this purpose, banker may need a Chartered Accountant’s remittance letter/certificate.

Amit Kedia and Paresh Kubadiya contributed to this article.

Vikas Vasal, national leader-tax, Grant Thornton India LLP.

You can send your queries to