A client in Dubai asked me last month: "Ankur, I've maxed out my FDs and mutual funds. What's next?" My answer was simple: Alternative Investment Funds.
AIFs give you access to private equity, venture capital, and hedge fund strategies that regular investments simply cannot offer. For NRIs with larger portfolios, they're a powerful way to participate in India's growth story.
At Belong, we've helped hundreds of NRIs navigate these sophisticated investments. Here's everything you need to know.
What Exactly Are Alternative Investment Funds?
AIFs are privately pooled investment vehicles regulated by SEBI. They collect money from sophisticated investors and deploy it into non-traditional assets like startups, private companies, real estate, and complex trading strategies.
Unlike mutual funds that anyone can buy with ₹500, AIFs are designed for high-net-worth individuals. The minimum ticket size is ₹1 crore for domestic AIFs. GIFT City AIFs require $150,000 (approximately ₹1.25 crore).
Think of AIFs as the next level of investing after you've built a solid foundation with fixed deposits and equity funds.
The Three Categories of AIFs
SEBI classifies AIFs into three distinct categories based on their investment strategy and risk profile.
Category | What They Invest In | Risk Level | Tax Treatment |
|---|---|---|---|
Category I | Startups, SMEs, infrastructure, social ventures | Moderate | Pass-through |
Category II | Private equity, debt funds, fund of funds | Moderate to High | Pass-through |
Category III | Hedge funds, derivatives, complex strategies | High | Fund-level taxation |
Category I AIFs back early-stage companies and infrastructure projects. The government encourages these through special incentives because they create jobs and drive economic growth.
Category II AIFs form the largest segment of India's AIF market. They invest in unlisted companies through private equity and debt strategies. These funds cannot use leverage except for daily operations.
Category III AIFs employ sophisticated trading strategies using derivatives and leverage. Hedge funds and PIPE (Private Investment in Public Equity) funds fall here. They carry higher risks but can generate returns regardless of market direction.
👉 Tip: If you're new to AIFs, Category II funds offer a balanced entry point with professional management and moderate risk.
Why GIFT City Changes Everything for NRI Investors
GIFT City AIFs offer game-changing advantages that domestic AIFs cannot match.
The most significant benefit? Tax efficiency. Category III AIFs in GIFT City that invest in Indian mutual funds are completely exempt from capital gains tax in India. For UAE-based NRIs, this means 100% tax-free returns since the UAE has no income tax either.
According to IFSCA data, GIFT City now hosts over 200 registered AIFs with committed capital exceeding $15 billion. These funds have already invested $6 billion across Indian and international markets.
NRIs investing through GIFT City also enjoy simplified compliance. You don't need a PAN card. You won't have to file Indian tax returns if your only income comes from Category I or II AIFs. The entire process works in foreign currency, so there's no rupee conversion headache.
👉 Tip: Use Belong's GIFT City AIF explorer to compare funds and their strategies before investing.
Minimum Investment and Eligibility
Here's what you need to invest in AIFs as an NRI:
For Domestic AIFs (SEBI-registered in mainland India): The minimum investment is ₹1 crore. Employees or directors of the AIF can invest with ₹25 lakh. You'll need an NRE or NRO account with an authorized Indian bank and a Portfolio Investment Scheme (PIS) account.
For GIFT City AIFs (IFSCA-registered): The minimum drops to $150,000 per the IFSCA circular dated February 2025. You can invest directly in foreign currency without NRE/NRO accounts. Repatriation is straightforward since GIFT City operates as a non-resident zone under RBI guidelines.
Step-by-Step: How to Invest in AIFs
Step 1: Verify your NRI status Confirm you meet FEMA's definition of NRI. Use our Residential Status Calculator if you're unsure.
Step 2: Complete KYC documentation Gather your passport, visa, overseas address proof, and photograph. GIFT City AIFs have streamlined KYC that doesn't require a PAN.
Step 3: Choose your fund category Match your risk appetite with the right category. Category I for patient capital in startups. Category II for balanced private equity exposure. Category III for sophisticated strategies.
Step 4: Select specific funds Research fund managers, track records, and fee structures. Look at vintage (how long the fund has operated), sponsor commitment, and exit history.
Step 5: Transfer funds and sign documents For GIFT City AIFs, transfer USD directly from your international bank account. For domestic AIFs, route through your NRE/NRO account.
👉 Tip: Always check if the AIF offers repatriable or non-repatriable investments. Most GIFT City AIFs are fully repatriable.
Tax Implications You Cannot Ignore
Taxation differs significantly based on where the AIF is registered and which category you choose.
Domestic AIFs (Categories I and II): Tax passes through to investors. Long-term capital gains face 12.5% tax. Short-term gains on equity attract 20% as per the July 2024 budget changes.
Domestic Category III AIFs: The fund pays tax at the Maximum Marginal Rate (approximately 42.74%). You receive post-tax returns.
GIFT City AIFs: Here's where it gets interesting. Category III AIFs investing in Indian mutual funds are exempt from Indian capital gains tax entirely. For NRIs in tax-free jurisdictions like UAE, this effectively means zero tax on returns.
If you invest exclusively through GIFT City Category I or II AIFs, you're exempt from filing Indian tax returns altogether.
Should You Invest in AIFs?
AIFs aren't for everyone. They suit NRIs who have:
Already built a foundation with fixed deposits, mutual funds, and perhaps real estate.
Surplus capital of at least ₹1 crore or $150,000 that they won't need for 3 to 7 years.
Higher risk tolerance than typical FD investors.
Interest in specific opportunities like startups, private equity, or hedge fund strategies not available through regular channels.
If you're still building your safe financial base, focus on NRE fixed deposits and diversified mutual funds first.
Your Next Step
AIFs represent the sophisticated end of NRI investing in India. They offer exposure to asset classes that traditional investments cannot access.
Before you invest, compare your options. Check our AIF explorer to see available GIFT City funds.
Want to discuss whether AIFs fit your portfolio? Join our WhatsApp community where 15,000+ NRIs share insights and ask questions daily. Download the Belong app to explore all your investment options in one place.
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