The Investor Mix Behind India’s AIF Growth

India’s AIF ecosystem continues to draw capital from a mix of domestic and foreign sources, with ₹5.63 lakh crore in funds raised on a net basis as of March 31, 2025. Within this, the share of domestic capital remains dominant, but foreign investor participation, especially from non-institutional channels, is becoming increasingly relevant across certain AIF categories.

Domestic investors contributed ₹4.08 lakh crore across all AIF categories. This includes capital from family offices, corporates, banks, institutions, and individual investors. Their role in building the base of long-term private capital continues to be central, especially in categories like Category I and III AIFs, where their relative share is higher.

This domestic dominance is both structural and strategic. Structurally, Indian HNIs and institutions have become more comfortable with illiquid and complex products, aided by wealth management platforms and evolving distributor sophistication. Strategically, AIFs give these investors access to unlisted opportunities, differentiated return profiles, and strategies that traditional MF or PMS structures don’t easily accommodate.

Foreign capital flows have been concentrated in Category II AIFs. More than ₹2 lakh crore came from foreign sources for Category II funds cumulatively as of the quarter ending March 31, 2025. The foreign investors include sovereign wealth funds, endowments, pension funds, and other non-retail international pools as well as NRIs, FVCIs (foreign venture capital investors), and FPIs (foreign portfolio investors).

The composition of foreign capital is notable not just for its size but also for its alignment. Much of it appears to be entering India via long-horizon mandates, private equity-style strategies, structured credit, and infrastructure-linked vehicles that require patient capital and governance comfort. This suggests a growing acceptance of the AIF format as a reliable, India-aligned investment channel for international allocators. It also reflects how domestic fund managers have improved in terms of disclosure, alignment, and fund structuring to meet global expectations.

A key catalyst for this shift has been the rise of credible, institutional-quality fund managers operating out of India. From domestic spin-outs to GPs seeded by global anchors, India now offers a deeper bench of managers who understand how to bridge both regulatory and reporting expectations across investor segments. For international LPs, this familiarity reduces friction and enhances trust.

Category I AIFs, though smaller in aggregate, saw ₹14,374 crore raised from foreign sources, largely from FVCIs. These flows tend to reflect more thematic capital, targeting social impact, SME finance, or innovation-related opportunities that align with philanthropic or frontier-risk capital appetites.

Interestingly, this segment has also begun attracting attention from mission-aligned global funds, such as those focused on climate, affordable housing, or rural inclusion. For them, the AIF structure offers a more targeted way to deploy capital at scale without waiting for policy-linked blended finance vehicles to materialize.

Category III AIFs, which typically operate in public markets via long-short, quant, or relative value strategies, saw ₹1,266 crore from the “Others” foreign investor bucket and ₹9,952 crore from NRIs. The NRI channel, in particular, has gained traction here, likely driven by the category’s liquidity profile, regulatory familiarity, and alignment with active public market strategies.

The growing interest from NRIs is worth tracking. For many, AIFs offer a pathway to actively participate in India’s capital markets while avoiding direct tax or compliance complexity. In addition, wealth advisors are increasingly positioning AIFs as curated, high-touch vehicles that complement NRI family office structures, offering both return potential and operational simplicity.

In aggregate, foreign capital accounted for a meaningful share of the total funds raised by AIFs, but there is still room for improvement. This reflects both opportunity and limitation. On one hand, it underscores India’s ability to attract overseas pools of capital via domestic structures. On the other hand, it also points to the structural barriers that still exist in converting more global interest into onshore AIF flows, ranging from tax clarity and capital controls to regulatory harmonisation.

Many of these constraints are well understood: lack of full tax pass-through, uncertainty around treaty benefits, and ambiguity in treatment of fund-of-fund structures are common pain points. What’s encouraging, however, is the growing appetite among both policymakers and regulators to resolve these issues in dialogue with industry.

For fund managers, the implication is fairly straightforward. Structuring decisions, fund documentation, and reporting practices increasingly need to balance domestic preferences with international expectations. The investor base is no longer homogeneous. AIFs must now navigate a matrix of investor types – HNIs, family offices, NRIs, global pensions, DFIs, all with different liquidity needs, return targets, and transparency thresholds.

This growing complexity also introduces a second-order requirement: operational maturity. As AIFs attract a broader base of investors, back-end infrastructure, fund administration, audit standards, and portfolio reporting will need to scale in parallel. The emphasis is shifting from just raising capital to managing it with clarity, rhythm, and institutional process.

India’s AIF market remains domestically led, but foreign participation is no longer incidental. It is becoming foundational in key categories, particularly where scale, duration, and structuring alignment are prerequisites. As AIFs move into their next phase of growth, the interaction between domestic capital depth and international capital design will define how the ecosystem scales and what it can ultimately finance.

That interplay will also shape the next wave of product evolution, whether it’s thematic AIFs targeting climate infrastructure, yield-focused AIFs backed by private credit, or multi-strategy platforms offering LPs both access and flexibility.

Ultimately, the strength of India’s AIF regime will lie not just in how much capital it can raise, but in how precisely it can channel that capital into complex, high-impact areas of the economy. With both domestic and foreign investors now participating meaningfully, the foundation has been laid. The next challenge is to scale with intent, integrity, and adaptability.

India’s AIF ecosystem is shifting — get a grip on the forces driving it through Private Capital, Public Impact and The Rise of Private Capital: A Global Shift in Wealth and Power.

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