How to Invest in an AIF in India: PPM, Capital Calls, Exit

An Alternative Investment Fund (AIF) is a privately pooled investment vehicle registered with SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012, in which you hold units rather than the securities themselves. To invest in an AIF you commit at least ₹1 crore, sign the private placement memorandum and contribution agreement, and pay in instalments as the fund issues capital calls.

Who can invest in an AIF: eligibility and the ₹1 crore minimum

SEBI sets the minimum investment in an AIF at ₹1 crore per investor; the floor is ₹25 lakh for employees or directors of the fund, and accredited-investor-only schemes have no prescribed minimum. Since September 2025 angel funds have no ₹25 lakh floor and take only accredited investors.

Individuals, HUFs, family offices, trusts, companies and institutions can invest, and NRIs through NRE or NRO accounts under FEMA rules. Accredited investor status (income of ₹2 crore or more, net worth of ₹7.5 crore or more, or ₹1 crore income with ₹5 crore net worth) opens lower thresholds in some AIF, SIF and PMS schemes.

Read the AIF PPM before you sign

The private placement memorandum (PPM) is the fund's main disclosure document and the contract you accept. SEBI requires it to set out the fee and distribution waterfall; it also holds the drawdown, default, transfer, tenure and extension terms. Verify the fund's SEBI registration against the PPM, then check:

• Fee base. On a ₹5 crore commitment with ₹2 crore drawn, a 2% fee is ₹10 lakh a year on committed capital but ₹4 lakh on invested capital. Typical ranges are 1% to 2.5% management fee and 15% to 20% carried interest, plus 18% GST on the management fee.
• Waterfall. Return of capital, then the hurdle, then a manager catch-up, then carried interest, then residual profit. Check whether the hurdle is hard or soft and how it is measured, for example by XIRR.
• Distribution fee. Every scheme must offer a direct plan with no placement fee (SEBI circular, April 2023); through a distributor the fee must be disclosed at onboarding.

How AIF onboarding works

Onboarding follows a fixed sequence with no fixed timeline:

• Choose a SEBI-registered scheme (see the AIF page for the three categories).
• Review the PPM and contribution agreement.
• Complete KYC: PAN, address and bank proof, FATCA/CRS declarations.
• Give demat details, as SEBI requires AIF units in demat form.
• Sign, and pay the first contribution.

AIF capital call and drawdown: commitment is not cash on day one

In a close-ended Category I or II fund you do not pay ₹1 crore up front. You sign a capital commitment; the fund issues a capital call (the drawdown notice) when it needs money; what you pay is your capital contribution, the balance your unfunded commitment. The terms capital call and drawdown are used interchangeably; follow your PPM's definitions.

One source's example: on a ₹1 crore commitment the fund calls ₹20 lakh, ₹15 lakh, ₹25 lakh and ₹20 lakh; you have paid ₹80 lakh and still owe ₹20 lakh. Category II marketing material describes about 25% at first close and the rest over 12 to 24 months, but observed funds call 10% to 100% at the first drawdown, and the PPM sets the notice period. Treat the unfunded amount as a future liability and keep the reserve in the entity that signed; calls may cover fees too.

What happens if you miss an AIF drawdown notice

Default clauses are contractual; under the PPM and contribution agreement a missed call can bring:

• default interest and recovery of the fund's costs;
• restrictions on future participation and loss of voting rights;
• forced transfer or sale of your units, dilution, or forfeiture.

SEBI lets Category I and II funds borrow briefly to cover a shortfall in called amounts; that helps the fund, not you.

The J-curve: why the early years look weak

This early-years pattern is the J-curve. Fees and expenses start early, sometimes charged on the full commitment, while capital goes in over 12 to 24 months and exits come years later, so your holding tends to show below cost before it climbs. That is why AIF reports quote XIRR on invested capital, which adjusts for drawdown and distribution timing, not the time-weighted return a PMS uses.

AIF lock-in period, distributions and exit

Category I and II AIFs must be close-ended with a minimum tenure of three years and in practice run seven to ten years; tenure can extend by up to two years with approval from two-thirds of unit holders by value. Lock-in means a close-ended scheme offers no routine redemption before maturity. Category III funds may be open-ended, with monthly or quarterly windows, notice periods, gates and exit loads.

Money returns as distributions through the waterfall: in private equity from strategic sales, secondary sales or IPOs; in private credit as monthly or quarterly interest and principal at maturity. Anything unsold at the end of tenure can go into a liquidation scheme or be distributed in specie under SEBI's framework.

Transfer of AIF units before maturity

A transfer is a sale to another eligible investor, not a redemption by the fund. The PPM sets the restrictions and any manager or trustee consent, and the price is negotiated around NAV, remaining tenure and unfunded commitments, usually at a discount for illiquidity. Agree who takes on the unfunded commitment, allow for tax and stamp duty, and expect a buyer search to take time.

AIF tax forms: 64C, 64D, 78 and 79

Category I and II AIFs are pass-through for non-business income: capital gains, interest and dividends keep their character and are taxed in your hands; business income is taxed at the fund level. The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026, moving the provision from Section 115UB to Section 224. Category III AIFs sit outside this regime and pay tax at the fund level, at up to the maximum marginal rate (about 42.744%) where it applies.

The fund files by 15 June and sends your statement by 30 June. Report the income in Schedule PTI (ITR-1 lacks it), reconcile the 10% TDS with Form 26AS and AIS, and note that TDS is rarely your final liability. These figures apply to FY 2026-27; confirm your position with a chartered accountant.

Frequently asked questions

Do I have to pay the full ₹1 crore AIF minimum upfront? Not in most close-ended funds. You commit ₹1 crore and pay it as capital calls arrive, on the schedule in the PPM. Open-ended Category III funds may ask for the full amount at entry.

How much notice does an AIF give before a capital call? There is no SEBI-wide notice period; the PPM and contribution agreement set it. Hold a reserve that can pay within that window, in the entity that signed.

Can I exit an AIF before the lock-in ends? Close-ended Category I and II funds offer no routine redemption before maturity; your routes are a permitted transfer of units, usually at a discount to NAV, or waiting for distributions. Open-ended Category III funds offer periodic windows with notice periods, gates and exit loads.

What is Form 64C and will I still receive it? Form 64C is the income statement a Category I or II AIF gives each unit holder under Section 115UB of the Income-tax Act, 1961. For income from FY 2026-27 the equivalent is Form 78 under Section 224 of the Income-tax Act, 2025. You use it to fill Schedule PTI; confirm your position with a chartered accountant.