Quick Introduction
For Non-Resident Indians (NRIs), India remains a promising investment destination for wealth creation. In terms of investing avenues, traditionally, NRI investors have extensively relied on real estate, fixed deposits, and listed equities. But as the Indian financial ecosystem matures, Alternative Investment Funds (AIFs) have emerged as a compelling option for diversification and higher-return opportunities.
An AIF privately pools investment vehicles that collect capital from sophisticated investors to invest in non-traditional assets like private equity, venture capital, private credit, and hedge fund strategies. For NRIs seeking exposure to India’s promising growth story, AIF in India provides an entry point that is both regulated and increasingly relevant.
This guide covers everything NRIs need to know: Eligibility, regulatory updates, tax considerations, and a step-by-step process on how to invest in AIFs in India.
What is an AIF?
An AIF (AIF full form: Alternative Investment Fund) is a privately pooled investment vehicle regulated by SEBI under the AIF Regulations, 2012. AIFs are classified in categories (Category I, II, and III) based on the strategy and the type of investments they can make. Unlike mutual funds, AIFs typically target accredited or qualified investors, employ active management, can have lock-ins, and may invest in illiquid private assets (Source) (Source).
AIF Categories, and What do they Mean for NRIs
- Category I AIFs: Invest in start-ups, small & medium enterprises (SMEs), social ventures (generally lower on commercial risk).
- Category II AIFs: Private equity funds, growth capital funds, mezzanine funds. They can invest across private markets but cannot take excessive leverage.
- Category III AIFs: Employ complex or opportunistic strategies (including hedge fund-like approaches) and can use leverage.
Each category has different suitability for investors, including NRIs, depending on the risk appetite and time horizon. SEBI governs the structure, reporting and disclosures of AIFs.
Are NRIs Eligible to Invest in AIFs in India?
NRIs can invest in SEBI-registered AIFs, but there are compliance steps and banking routes to adhere to. Funds must be routed through proper banking channels (NRE/NRO accounts as applicable), and investments must follow RBI/FEMA rules and the AIF’s own subscription documents. Some AIFs accept NRIs only on a non-repatriable basis, while others provide repatriation; which calls for thorough checking of the AIF’s terms. For practical process guidance (opening accounts, KYC, documentation), NRIs often use specialist custodians or distributors (Source) (Source).
Important Regulatory Updates NRIs should Know in 2025
AIF regulations have evolved during 2025, and the two recent developments that matter to all AIF investors, including NRIs are:
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- SEBI’s Co-investment Framework (Sep 2025): In September 2025, SEBI introduced a framework allowing AIFs to offer co-investment opportunities within their fund structures. This means select investors can invest alongside the fund in specific deals, with clearly defined terms, eligibility criteria, and risk disclosures. The move standardizes the co-investment process, making it more transparent and accessible.
For NRIs looking to invest in India’s private markets, this framework opens the door to high-value deals that were previously limited to large institutional investors. It also allows for better portfolio diversification and gives NRIs greater clarity on risks and returns, helping them make more informed investment decisions within AIFs. (Source).
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- RBI Directions on Investments in AIFs (2025 ): On July 29, 2025, the Reserve Bank of India (RBI) issued the “Investment in AIF Directions, 2025,” setting new limits on Regulated Entities’ (REs) exposure to Alternative Investment Funds (AIFs). Effective from January 1, 2026, these guidelines cap individual RE investments at 10% and collective RE investments at 20% of an AIF’s corpus. Additionally, if an RE’s contribution exceeds 5% and the AIF has downstream investments in a debtor company of the RE, the RE must make a 100% provision on its proportionate exposure, subject to a maximum of the direct loan and/or investment exposure of the RE to the debtor company. Investments in subordinated units of AIFs must be deducted entirely from capital funds, apportioned between Tier-1 and Tier-2 capital. These measures aim to strengthen financial stability and prevent over-concentration of risks.
While NRIs are not directly regulated by the RBI, these new directions influence the dynamics of AIF investments. The caps on RE investments may alter the liquidity and capacity of funds, potentially affecting the availability and economics of AIF schemes. NRIs should be aware of these regulatory changes as they may impact the structure and performance of AIFs in which they consider investing. (Source).
Since the regulations are evolving and changing, NRIs must check the latest SEBI and RBI circulars/ policies before committing capital to AIFs.
Why should NRIs Consider AIFs?
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- Access to Private Deals: early-stage equity, growth rounds, and private credit opportunities not available through public markets.
- Diversification: AIFs let NRIs diversify away from listed equities, mutual funds, and real estate.
- Professional Management: AIF managers run active strategies with dedicated deal teams.
It is equally important to note that AIFs can be illiquid and fee-heavy. NRIs should view AIF allocations as strategic, medium-to-long-term positions, not short-term yield plays.
Key Steps for NRIs Investing in AIFs
- Confirm Eligibility and Repatriation Terms: Check the AIF’s offer documents to confirm that NRIs can invest (repatriable vs. non-repatriable) Source
- Route Funds Correctly: Use NRE/NRO/FCNR as stipulated; many funds require KYC + FATCA documentation Source
- Complete KYC & Subscription: AIFs require investor attestations, proof of source of funds, and often investor accreditation checks Source
- Understand Lock-in and Liquidity: Most AIFs have multi-year lock-ins and periodic windows for redemptions (if any). NRIs should plan liquidity accordingly Source
- Tax and Reporting: NRIs must consider Indian tax implications (pass-through vs. fund-level taxation depending on the structure) and repatriation rules; consult tax counsel Source
AIF Checklist for NRIs: What to Check before Signing?
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- Is the AIF SEBI-registered and in which category? (SEBI registration is non-negotiable) Source
- Fund strategy, track record, and manager’s conflict policy Source
- Fee structure (management fees, carried interest) and expected cashflow timelines Source
- Exit mechanisms and secondary market possibilities (some AIF units may list on exchange if structured for liquidity). Source
- AML/KYC, FATCA, and documentation requirements for NRIs Source
Difference Between AIF and Mutual Fund Investment in India
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- Investor Base: Mutual funds cater to retail; AIFs are for accredited and sophisticated investors
- Minimum Investment: Mutual funds are very accessible (as low as ₹500); AIFs require a large minimum commitment (typically ₹1 Crore)
- Regulation: Mutual funds are highly regulated, AIFs are relatively less-regulated
- Liquidity: Except for close-ended funds, Mutual funds are liquid; AIFs often have multi-year lock-ins
- Risk: Mutual funds spread risk across liquid assets; AIFs involve higher risk but unique opportunities
For NRIs, AIFs should be seen as an alternative to mutual funds, not a replacement.
Taxation for NRIs Investing in AIFs
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- Category I & II AIFs: Generally treated as pass-through vehicles (income taxed in the hands of investors).
- Category III AIFs: Taxed at the fund-level.
- TDS: Tax deducted at source on distributions made to NRIs.
- Repatriation: Subject to FEMA and RBI rules.
- Double Taxation Avoidance Agreements (DTAA): May provide relief, but professional advice is crucial.
Risks of AIF Investments
Investing in AIFs carries inherent risks that NRIs should consider carefully.
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- Illiquidity Risk: Most AIFs have long lock-in periods (often 3-7 years or more), severely restricting access to your invested capital for the entire duration.
- Regulatory Risk: Changes in government policies or SEBI regulations can directly impact fund operations, investment strategies, and potentially alter the expected returns.
- Market & Valuation Risk: AIFs invest in unlisted companies, real estate, and other alternative assets, which are subject to high market volatility and significant uncertainty in accurate valuation.
- High-Cost Structure: Fund management and performance fees for AIFs are typically much higher than those for traditional mutual funds, which can eat into the net returns for investors.
- Mis-selling & Complexity Risk: There is a risk of the product being mis-sold if investors do not perform thorough due diligence to fully understand the fund’s complex structure, strategy, and terms.
Conclusion
For NRIs, AIF investment can unlock access to India’s most dynamic private market opportunities. But it requires caution, careful evaluation, and compliance-first planning. NRIs should always verify AIFs’ SEBI registration, align investment tenure with personal liquidity needs, and account for tax implications both in India and their country of residence.
At Rurash Financials, we specialise in guiding NRIs through the complexities of investing in Alternative Investment Funds in India — from eligibility checks and documentation to fund selection and repatriation planning.
Ready to explore AIFs? Connect with Rurash Financials today and make informed, compliant, and growth-oriented investment decisions to build long-term wealth.