5 min read · By Viren Makwana
A mutual fund and an AIF can hold some of the same assets, yet they are built for different investors and behave very differently once your money is in. The gap is not just the minimum ticket. It is liquidity, transparency, tax and how much the outcome depends on one manager.
India now has four main routes for investing through a professional manager, all regulated by SEBI. Here is how they compare.
| Mutual fund | Specialised investment fund (SIF) | Portfolio management service (PMS) | Category II AIF | |
|---|---|---|---|---|
| Minimum investment | Often ₹100–₹5,000 | ₹10 lakh | ₹50 lakh | ₹1 crore |
| Who it is for | Everyone | Investors with larger surplus | HNIs | HNIs, family offices, institutions |
| Liquidity | Daily for open-ended funds | Varies by strategy | You own the securities and can exit | Locked in for the fund’s life, usually 3–10 years |
| What it can buy | Mainly listed shares and bonds | Listed securities, with limited long-short positions | Listed securities in your own account | Unlisted companies, private credit, real estate projects |
| Fees | Base expense ratio capped by SEBI | Mutual fund-style caps | Negotiated, often with a performance fee | Negotiated: management fee plus carried interest |
| Tax | Paid by the investor on redemption | As for mutual funds | Paid by the investor on each trade | Pass-through: paid by the investor as income is distributed |
Where mutual funds win
- Liquidity. You can usually redeem an open-ended fund in a few days.
- Cost. SEBI caps the base expense ratio, and direct plans are cheaper still.
- Diversification and disclosure. Portfolios are disclosed monthly and spread across many holdings.
- Simple tax. Equity funds held for over 12 months pay long-term capital gains tax of 12.5% on gains above ₹1.25 lakh a year. Gains on shorter holdings are taxed at 20%.
Where AIFs win
- Access. Category II AIFs invest in unlisted growth companies, structured credit and real estate projects that mutual funds cannot hold in size.
- Return potential. Investors accept the lock-in for an illiquidity premium, often targeting mid-to-high teens in equity or low-to-mid teens in credit.
- Concentration by design. A focused portfolio of 10–25 positions lets a skilled manager’s best ideas drive the result.
- Alignment. The manager must keep its own money in the fund and is paid mainly through carried interest above a hurdle.
The trade-offs that matter most
Lock-in. An AIF commitment is a multi-year decision. You cannot exit early in most funds, and capital is drawn and returned on the manager’s timetable.
Manager risk. The gap between the best and worst private funds is far wider than between mutual funds. Picking the manager is the main decision.
Valuation. Unlisted holdings are valued periodically, not priced daily. Reported NAVs can lag reality in both directions.
Tax mechanics. Category II funds are pass-through, so you pay tax as the fund earns and distributes. Category III funds are taxed at the fund level, often at the highest marginal rate, which can make a large difference to net returns.
How to decide
For most investors, mutual funds should remain the core of a portfolio. AIFs work as a satellite: money you will not need for five to seven years, with a defined role such as private credit income or growth equity exposure.
If you are considering one, size the commitment so the lock-in never forces you to sell something else in a bad market. Spread commitments across vintage years rather than putting everything into one fund at one time.
Sources
- Compilation of regulatory updates for AIFs, Oct 2025–Apr 2026 – S&R Associates
- Specialised investment funds explained – JioBlackRock AMC
This article is for general information only and is not investment, legal or tax advice, or an offer or solicitation to buy or sell any security or fund units. Figures are drawn from public sources as of the date shown and may change. Speak to a qualified adviser before making any investment decision.