In this Leading Questions piece, Akshaya Bhansali and Suyash Bhandari explain how High Networth Investors (HNIs) should weigh Alternative Investment Funds (AIFs) against mutual funds and Portfolio Management Services (PMS), focusing on access, liquidity, tax, costs and investor suitability, especially after SEBI’s 2026 reforms.
For a high net worth investor, choosing between an Alternative Investment Fund, a mutual fund and a portfolio management service is no longer only a question of ticket size. In October 2026, SEBI notified the SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2026, widening who may invest in AIFs as an Accredited Investor, and the SEBI (Portfolio Managers) Regulations, 2026. Access to AIFs has become easier. Assessing whether they are suitable has not.
Question: Is an AIF simply a larger-ticket version of a mutual fund or PMS?
Answer: No. Though each one of them essentially involves investment management, they are regulated by SEBI under a separate framework resting on a different scope of activities and minimum investment value.
Mutual funds are governed by the SEBI (Mutual Funds) Regulations, 2026 and operate investment schemes where the public at large can participate. The minimum investment in mutual funds can typically range to as low as INR 1,000.
On the other hand, Alternative Investment Funds operate schemes where the funds are pooled privately. Minimum ticket size for investment in AIF is INR 1 Crore unless the investor falls within an exempt category, including Accredited Investors.
While units of Mutual Funds and AIFs are the instruments in which the investors invest, portfolio managers provide investment management services involving the client's own demat account and with a minimum investment of INR 50 Lakhs.
Question: What can an AIF give an HNI that the other two cannot?
Answer: Access. Category I AIFs invest in start-ups and venture capital, Category II AIFs in private equity, private debt , and Category III AIFs can employ leverage and deal in derivatives, including through long-short strategies.
The PMS framework approved by SEBI's Board on September 24, 2026 permits discretionary portfolio managers to invest only up to 10 per cent of client AUM in investment-grade, unlisted, non-convertible debt, with client consent, while investment by mutual fund schemes remains heavily regulated.
The case for an AIF therefore rests on exposure that cannot be replicated in the listed market. Where an AIF offers a listed equity strategy, the investor should ask what it provides that a PMS with a similar strategy would not.
Question: What does the investor give up in return?
Answer: Principally, liquidity. Category I and II AIFs are close-ended, with a minimum tenure of three years, and capital committed at the outset is called in tranches.
SEBI's data shows that, as of June 30, 2026, AIFs held commitments of INR 17.53 lakh crore against funds raised of INR 7.59 lakh crore. Across funds of different vintages, the larger part of committed capital is yet to be called, and must remain available to investors until it is.
The investor also gives up visibility: a PMS client sees each security in their own demat account, while an AIF investor holds units in a pooled vehicle. On cost, AIFs have been required since May 1, 2023 to offer a direct plan without distribution or placement fees.
Question: Does taxation favour one structure over another?
Answer: A mutual fund investor is taxed when units are redeemed. A PMS client owns the securities directly, so each sale within the portfolio is a taxable event in the client's hands.
Category I and II AIFs enjoy pass-through status, introduced through Section 115UB by the Finance Act, 2015. Income other than business income is taxed in the investor's hands as if the investment had been made directly, while business income is taxed at the fund level. The Finance Act, 2025, further clarified that securities held by these funds are capital assets.
Category III AIFs have no statutory pass-through and are taxed at the fund level.
Hence, returns across structures should therefore be compared only on a post-tax basis.
Question: What changes after the October 2026 amendments?
Answer: The AIF (Third Amendment) Regulations, 2026, notified on October 9, 2026, expand the Accredited Investor framework in three respects.
Individuals, HUFs, family trusts and sole proprietorships may now qualify on securities market exposure of at least INR 5 Crores, and body corporates, LLPs and other trusts at INR 20 Crores. Investors may be accredited not only by Accreditation Agencies but also by specified SEBI-registered or regulated entities, in the manner specified vide Circular dated November 05, 2026. Persons resident outside India, as defined under FEMA, 1999, are deemed to be Accredited Investors.
Once accredited, an HNI is not bound by the INR 1 Crore minimum. The trade-off is that Accredited Investors only funds operate under a lighter framework: since the Second Amendment Regulations of July 2026, the provisions on SEBI's comments on the placement memorandum under Regulation 12(2), (3) and (3A) do not apply to such funds.
Accreditation is therefore a waiver as much as a qualification. Where the manager offering the product also accredits the investor, the investor should independently verify the basis.
Meanwhile, from April 1, 2027, under the Portfolio Managers Regulations, 2026, portfolio managers may invest client funds in foreign securities, and a new route will permit managed portfolios of direct mutual fund plans from INR 25 Lakhs.
Question: How should an HNI decide whether an AIF belongs in the portfolio?
The three structures are complementary; the question is one of allocation rather than choice. Four questions decide it.
First, whether the investor needs exposure unavailable in the listed market.
Second, whether the committed capital can stay available until called and then remain invested for the full tenure of the fund.
Third, whether the investor is prepared to delegate every investment decision to the manager; an investor who wishes to see and direct individual holdings is better served by a PMS.
Fourth, whether the category of AIF suits the investor's tax profile.
An AIF is suitable where the answer to all four is yes. Where it is not, accreditation may make the investment possible, but it might not make it appropriate.
Question: What should an investor examine before signing?
The placement memorandum and contribution agreement govern most of the investor's rights, particularly in an Accredited Investors only fund. At a minimum, examine:
Economics: The basis of the management fee, the hurdle rate, carried interest and any clawback.
Drawdowns: The notice period for capital calls and the consequences of default.
Governance: Key person events, the vote required to remove the manager, and consent thresholds for conflicted transactions.
Differential Rights: Side letters granted to other investors.
Exit: The liquidation period, in-specie distribution of unliquidated investments, and the dispute resolution mechanism under Regulation 25.
These terms are best negotiated before signing; after the first drawdown, the investor has little leverage.
The bottom line: SEBI's 2026 reforms have widened access to AIFs, not reduced the diligence they demand. The question for an HNI is not whether they qualify, but whether the investment suits their horizon, liquidity, tax position and appetite for delegation.
Akshaya Bhansali is the Managing Partner of Mindspright Legal. Suyash Bhandari is a Principal Associate at the Firm.