India’s alternative investment funds (AIFs) are increasingly launching fund of funds (FoF) to work around the market regulator’s cap on the number of investors, which aims to prevent them from becoming too large and resembling mass retail products like mutual funds.
According to the Securities and Exchange Board of India (Sebi), no scheme of an AIF can have more than 1,000 investors, with an exception for angel funds. The cap has become more relevant as the industry grows rapidly and funds draw interest from a widening pool of high-net-worth individuals, family offices and global investors.
By placing investors in a FoF that then allocates capital across underlying AIFs, managers can effectively broaden participation while staying within the letter of the rules.
“We have seen a gradual increase in FoFs in the industry as it helps an AIF accommodate investors who could not participate in a fund the first time around,” said Pratik Jain, managing partner–investments at Wealth Co. Asset Management Pvt. Ltd. “It is not unusual for a fund to be oversubscribed and reach the 1,000-investor limit.”
AIFs are privately-pooled investment vehicles that raise money from sophisticated investors to invest according to a defined strategy. They are broadly classified into Category I, II and III, covering venture capital, private equity, debt and hedge-fund-style strategies.
A fund-of-fund, by contrast, builds a portfolio of other funds rather than directly investing in companies or securities. In the AIF ecosystem, this allows managers to combine different strategies and vintages in a single product.
Each investor, including individuals and entities, is counted as a single investor in an AIF. This means that when a fund of fund invests in an AIF, it is treated as one investor even though it may pool money from many underlying investors, experts said.
For instance, if an AIF already has 900 direct investors and then receives capital from one FoF that itself has 200 investors, the AIF’s investor count rises to only 901, not 1,100, allowing the fund manager to accommodate more investors indirectly without breaching the regulatory cap, and creating additional headroom for fundraising through such pooled structures.
"We have observed this trend in certain cases, particularly when an existing AIF strategy has delivered strong performance and sees elevated investor demand in subsequent vintages," said Chintan Bhatt, managed solutions - fund manager and principal officer, Neo Asset Management.
A query emailed to Sebi remained unanswered till press time.
Industry executives said that while the investor cap was designed to keep AIFs within the private placement framework that allows them to raise money from a select group of sophisticated investors, the FoF route provides flexibility as funds scale up. To be sure, an FoF also has a cap of 1,000 investors per fund.
“Opening an FoF seems to be a way to manage a pool of investors with respect to their investments in AIFs. It seems like an evolution of wealth management practices,” said Siddarth Pai, founding partner, chief financial officer, and environmental, social and governance (ESG) Officer at 3one4 Capital, a venture capital firm.
“Accredited investors do not come under the 1,000 investor threshold, so wealth managers are pushing people to get accredited,” he added.
Sebi introduced the accredited investor framework to identify sophisticated investors with greater risk-bearing capacity. In an “accredited investors-only” fund, such investors are excluded when calculating the 1,000-investor cap.
“We have had multiple discussions with Sebi to increase the 1,000 investor per fund norm, but the regulator is asking AIFs to make their investors accredited, keeping in mind their goal to make all investors in the space accredited,” said an asset management company (AMC) executive on the condition of anonymity.
A regulatory official said such sidestepping has been around for some time. Recent launches show it is now gaining traction.
Pantomath-backed Bharat Value Fund has launched a series-6 fundraise through a domestic FoF. On the other hand, Neo Asset Management, the asset management arm of Neo Group, launched the India All-Cap Core Equity Fund, a multi-manager FoF structured as a Category III AIF in Gujarat International Finance Tec-City (GIFT City) in December 2025. Aarth AIF is also planning to launch an FoF in the GIFT City.
Alongside regulatory considerations, FoFs are also emerging as a convenient way to package diversified investment strategies. For some managers, the structure also opens doors to global investors.
“A Fund of Fund helps tap into foreign investors who are looking for a better tax structure, similar to the ones provided by mutual funds,” said Adheesh Kabra, co-founder and fund manager at Aarth AIF. “It also helps tap foreign interest as an FoF can invest in AIFs popular abroad, which helps attract investors as it is a better brand than a domestic AIF.”
FoFs are taxed based on the structure of the underlying AIF. Category I and Category II AIFs, including FoFs, set up under these categories, generally enjoy pass-through taxation, where income, other than business income, is taxed in the hands of investors rather than at the fund level. Category III AIFs, on the other hand, do not have pass-through status and are taxed at the fund level. This makes them more tax inefficient compared to the other two categories as the tax rates for a Category III AIF are almost double those for Category I and Category II.
Funds set up in GIFT City are particularly attractive as FoFs domiciled in the region can benefit from certain tax incentives and may offer a more compelling structure to overseas investors.
"The structure offers tax efficiency for UAE and Singapore–based non-residents, with zero fund-level capital gains tax, thereby eliminating Indian tax drag," said Bhatt about Neo's India All-Cap Core Equity Fund. "It also simplifies participation by removing the need for NRE/NRO (non-resident external/ non-resident ordinary) accounts, demat accounts, or Indian tax filings," he added.
India’s alternatives industry has expanded sharply in recent years. The $180 billion industry has grown at a compounded annual growth rate of 30.7% between FY21 and the first six months of fiscal 2026, outpacing most other managed investment products, according to a February report by Crisil Intelligence and Oister Global.
AIFs had raised commitments of ₹15.74 trillion as of December 2025, with ₹6.45 trillion investments. Domestic investors contributed ₹5.12 trillion, while foreign investors invested ₹2.62 trillion, according to Sebi data. There are 1,829 registered AIFs in India, according to the regulator.