India’s alternative investment fund (AIF) framework has undergone sweeping changes over the past six months, with reforms in September 2025 and February 2026 reshaping how accredited investors participate in private markets.
The changes—ranging from co-investment vehicles and accredited investors (AI) only schemes to extended fund tenures and lower entry barriers for social funds—aim to deepen the private capital ecosystem. But greater flexibility comes with higher complexity, concentration risk and liquidity trade-offs that investors must evaluate carefully.
Rajan Arora, a 42-year-old entrepreneur from Firozpur, allocates 10–20% of his portfolio to AIFs. Unlike mutual funds that pool in investors' money to invest primarily in listed equities and bonds, AIFs are also pooled investments but can invest beyond securities and bonds to invest in less traditional assets such as private equity, venture capital, real estate and hedge funds.
“My allocation to AIFs was driven by one simple realization that traditional instruments capture broad market beta, but they rarely provide access to early-stage alpha. AIFs, particularly Category I and II funds, give access to growth-stage private companies before they become mainstream,” said Arora.
CIVs raise concentration
To allow greater allocation flexibility and higher exposure to conviction bets, the Securities and Exchange Board of India (Sebi) in September 2025 permitted Category I and II AIFs to create separate co-investment vehicles (CIVs) for individual companies. Accredited investors can now invest directly in a specific company alongside the main AIF instead of only through a diversified fund.
“Each CIV is ring-fenced (separate bank and demat accounts), follows the same or better terms as the main AIF investment, and exits at the same time as the AIF. Th improves transparency, governance, and alignment,” said Rajesh Singla, chief executive officer (CEO) and fund manager, Alpha AIF.
According to Singla, while CIV may increase concentration risk, it also offers the potential for higher upside if the chosen company performs strongly. Governance standards are relatively stronger than earlier informal co-investment arrangements because CIVs operate with improved transparency and investor protection mechanisms.
AI-only flexibility
The creation of AI-only schemes and lowering minimum investment thresholds in large-value funds to ₹25 crores from ₹70 crore in the September 2025 guidelines was another important step taken to create new avenues for sophisticated investors.
According to the Sebi, accredited investors must have at least ₹2 crore in annual income, or ₹7.5 crore in net worth ( ₹3.75 crore in financial assets), or ₹1 crore in income with ₹5 crore in net worth ( ₹2.5 crore in financial assets).
“Allowing differentiated terms and relaxing certain investor limits can help managers attract larger investors and structure deals more efficiently. This could improve access to better opportunities and align investors who share similar investment objectives,” said Prashant Mishra, founder and CEO, Agnam Advisors, a Sebi-registered investment advisory.
“If you are an accredited investor, these reforms translate into greater flexibility and efficiency in structuring private market exposure, while better aligning the fund manager’s incentives with a higher risk-taking appetite,” said Thomas Stephen, director & head—preferred, Anand Rathi Share and Stock Brokers.
The reforms also enhance transparency and ease compliance. Earlier, meaningful private equity participation was largely confined to the Portfolio Management Services (PMS) route, which involved extensive paperwork and limited flexibility.
Longer fund tenures
AI-only schemes received substantial flexibility, including exemption from pari-passu requirements, permission for up to five years of cumulative tenure extensions, removal of the 1,000-investor cap, and reductions in certification and trustee-level responsibilities.
“In addition, with tenures being allowed to extend beyond the past limit of two years to five years in AI-only schemes, these funds provide “patient capital” to support encouraging the potential for improving internal rates of return (IRR) on stagnant or heavily distressed assets and long-gestation infrastructure projects by allowing a longer period of ownership before having to conduct forced sales,” said Singla.
Winding-up balance
Sebi’s proposed flexibilities around “winding up” seek to balance liquidity concerns at the end of a fund’s tenure with investor protection.
“Proposals such as allowing a fund to have an “inoperative” status where, despite no active investments, funds are not forced to prematurely close even though they are waiting on certain legal or tax outcomes; to have a more structured wind-down process that includes a three-year cap on retention for expenses. These look like measures that would help the fund deliver better returns to the investor,” said Stephen.
However, the key issue is control.
“If extensions require meaningful investor consent, the framework works well because investors retain control. But if managers can extend timelines too easily, it risks delaying distributions and prolonging illiquidity,” said Mishra.
₹1,000 social bet
“Social Impact Fund (SIFs) are Category I AIFs that invest in non-profit organizations (NPOs) registered or listed on the Social Stock Exchange (SSE). The SSE itself remains illiquid. Until now SIFs on the SSE had high minimum investment thresholds of ₹2 lakh, making it difficult for individual investors to participate,” said Kresha Gupta, director & fund manager, Steptrade Capital, an investment management company.
Reducing the minimum to ₹1,000 aligns with the regulator's objective of broadening capital access for social enterprises. These funds also invest in social enterprises and impact projects in healthcare, education, and sustainability. However, SIFs are AIF structures with no guaranteed exit window.
A retail investor contributing ₹1,000 may not fully grasp that capital could be locked for years, with no secondary market and uncertain principal return. Social impact metrics are self-reported, variable in methodology, and difficult to independently verify.
“The SSE itself lists a limited number of NPOs with varying governance quality. At ₹1,000 ticket sizes, retail investors will likely cluster capital in the most visible names. Democratization of social impact investing is a legitimate policy goal, but it requires a parallel investment in financial literacy campaigns, standardized impact reporting frameworks, and secondary market infrastructure,” said Gupta.
What it means for investors
In summary, AIF reforms aim to deepen the market with greater flexibility, enabling concentrated co-investments, extending fund tenures, and widening participation in social impact. But they also introduce new governance, liquidity and concentration risks.
“For serious investors, regulation is not a deterrent; it is a filter that separates disciplined managers from opportunistic ones,” said Singla, noting that stronger oversight enhances credibility among family offices, HNIs and global investors.
AIFs are increasingly positioned as products for large-capital, long-horizon investors.
“They are not retail products. The positioning is now clearly aligned with long-term, patient capital such as family offices, endowments and large investors,” said Shyam Sekhar, founder, ithought Financial Consulting.
“The earlier narrative of AIFs being marketed on tax efficiency and convenience is gradually fading. The new regulatory direction suggests that investment horizon and capital commitment, not tax arbitrage will be the key drivers for investors going forward,” said Shekhar.
“For investors seeking flexibility or a shorter five-year horizon, PMS may still be more suitable. But for those willing to lock in larger capital for 10 years and who have the risk appetite and understanding of the structure, AIFs are increasingly better positioned,” said Shekhar.
For accredited, risk-aware investors willing to lock in funds and accept complexity, AIFs offer deeper private-market access. For others seeking liquidity and flexibility, traditional routes may remain more suitable.