Before investing in an Alternative Investment Fund (AIF), do not start with the fund’s target IRR or brand name.
Start with five questions: What exactly does the fund invest in? Who generated the manager’s previous track record?
How much of that performance has been realised in cash? What will you pay in total fees and carry? And how will you get your money back if exits take longer than expected?
A proper AIF due diligence exercise should then review the PPM, contribution agreement, category, investment strategy, manager and investment committee, realised and unrealised performance, IRR and private-market multiples, fee waterfall, portfolio concentration, leverage, valuation, conflicts, key-person protection, tax treatment, liquidity, service providers and end-of-fund mechanics.
The standard AIF minimum investment is generally ₹1 crore per investor, subject to regulatory exceptions.
That threshold is a regulatory entry condition-not evidence that a scheme suits every investor who can write a ₹1 crore cheque.
Why AIF Due Diligence Is Different from Choosing a Mutual Fund
A mutual fund investor can usually compare daily NAVs, standardised categories, expense ratios and long public track records. An AIF investor often faces a very different set of information.
Portfolio assets may be unlisted, valuations may be periodic rather than continuously market-priced, fees may involve multi-step waterfalls, capital may be drawn over time, and the fund may remain closed for years.
That means you can’t evaluate an AIF by copying the mutual-fund habit of sorting products by one-year returns.
In private equity, venture capital, private credit, and real-estate strategies, the investor underwrites a process: sourcing, due diligence, deal structuring, governance, portfolio monitoring, and exits.
In Category III strategies, the investor may instead be underwriting trading skill, leverage management, liquidity and operational risk.
The most important information is therefore often found in the PPM, contribution agreement, audited reports, and the manager’s realised track record, not in the marketing deck.
First, understand the Regulatory Structure
India’s AIF framework separates funds into Category I, Category II and Category III. The category influences what the fund can do, how it is structured, the way valuation and NAV work, and the broad tax framework.
Before comparing two funds, make sure they actually belong in the same comparison set.
| Factor | Category I AIF | Category II AIF | Category III AIF |
| Typical strategies | VCF, infrastructure, SME, social impact, special situations and other specified categories | Private equity, private credit/debt, funds of funds and other residual alternative strategies | Hedge-fund-like, trading and complex strategies; may use leverage within regulatory limits |
| Structure/tenure | Generally closed-end; minimum 3-year regulatory tenure | Generally closed-end; minimum 3-year regulatory tenure | Can be open-ended or closed-ended |
| Leverage | Generally restricted except permitted temporary/operational needs and specific regulatory situations | Generally restricted except permitted temporary/operational needs and specific regulatory situations | May employ leverage subject to SEBI conditions and disclosure requirements |
| Valuation / NAV lens | Independent valuation generally at least every 6 months; may extend to annual with 75% investor approval by value | Same broad valuation requirement as Category I | NAV calculation independent of fund-management function; at least quarterly for closed-end and monthly for open-ended |
| Tax framework | Section 115UB pass-through framework for non-business income; actual tax follows income character | Section 115UB pass-through framework for non-business income; actual tax follows income character | Not covered by the same Section 115UB Category I/II pass-through definition; tax depends on fund legal structure and income |
The 25-Point AIF Due Diligence Checklist
1. Confirm the exact AIF category and strategy
Don’t start with the brand name. Confirm whether the scheme is Category I, II or III and then identify the actual return engine: venture capital, private equity, private credit, real estate, long-short, special situations, fund of funds or something else.
Why it matters: Different categories have different liquidity, leverage, valuation and tax characteristics. Two AIFs with the same ₹1 crore minimum can behave completely differently.
Evidence to request: PPM, SEBI registration, scheme description
2. Verify SEBI registration and the specific scheme
Check the AIF’s registration on SEBI’s registered-intermediaries database and make sure the legal entity, manager and scheme documents match what is being marketed.
Why it matters: A familiar manager brand does not eliminate the need to verify the exact registered vehicle and scheme.
Evidence to request: SEBI AIF register, PPM, contribution agreement
3. Read the PPM before the sales deck
Treat the Private Placement Memorandum as the primary disclosure document. SEBI requires standardised PPM templates for most Category I/II and Category III schemes, subject to specified exemptions.
Why it matters: A presentation is marketing material; the PPM contains the investment objective, strategy, conflicts, risk factors, fee terms, waterfall, disciplinary history and legal framework.
Evidence to request: PPM Part A and Part B
4. Understand the fund size, first close and final close
Check target corpus, minimum corpus, hard cap, first-close date, final-close mechanics and whether the manager can accept additional commitments after you invest.
Why it matters: Later closings can change portfolio scale and may involve equalisation mechanics so investors entering at different times are treated consistently.
Evidence to request: PPM timeline and contribution agreement
5. Check your minimum commitment and capital-call mechanics
The standard minimum AIF investment is ₹1 crore per investor, subject to regulatory exceptions. Understand whether you pay everything upfront or commit capital that you draw down later.
Why it matters: A ₹1 crore commitment can create future liquidity obligations. Missing a capital call can trigger interest, dilution, forfeiture or other remedies under the documents.
Evidence to request: Contribution agreement, drawdown clause
6. Examine sponsor/manager commitment – the ‘skin in the game’
Check how much capital the sponsor or manager is investing and whether that capital is funded genuinely rather than represented by a waiver of management fees.
Why it matters: Regulatory continuing-interest requirements create alignment, but higher commitment alone does not guarantee good decisions.
Evidence to request: PPM sponsor/manager commitment section
7. Assess the manager’s relevant track record
Ask for strategy-specific experience, not simply years in financial services. A private-equity team, a private-credit team, and a long-short trading team require different capabilities.
Why it matters: Look at prior funds managed by substantially the same decision-makers, the market cycles experienced and the percentage of performance generated by the present team.
Evidence to request: PPM track record, prior-fund reports, team biographies
8. Separate realised performance from unrealised valuations
Ask how much of the historical performance comes from assets that have actually been exited versus portfolio companies still held at estimated values.
Why it matters: An attractive headline IRR can depend heavily on unrealised marks. Real cash returned is harder to overstate.
Evidence to request: DPI, realised IRR, exit schedule, valuation reports
9. Compare gross IRR with net IRR
Do not accept a historical IRR without knowing whether it is gross or net of management fees, operating expenses and carried interest.
Why it matters: The difference can be substantial, especially in high-fee or long-duration strategies.
Evidence to request: Track-record table, audited fund accounts
10. Review MOIC, DPI, RVPI and TVPI together
Use multiple private-market metrics rather than one return number. MOIC shows value multiple, DPI shows realised cash, RVPI shows remaining value, and TVPI combines realised and unrealised value.
Why it matters: A fund with high TVPI but low DPI may still have most of its reported value locked in unexited assets.
Evidence to request: Quarterly/annual investor report
11. Compare the right vintage, strategy and benchmark
Compare an AIF with funds launched in similar periods and following genuinely comparable strategies. Review SEBI-mandated AIF benchmarking information where applicable.
Why it matters: Private-market returns are heavily affected by the year in which capital is deployed. Comparing a 2021 private-equity fund with a 2025 private-credit fund is not meaningful.
Evidence to request: Benchmarking report, peer/vintage data
12. Understand the complete fee stack
List management fee, setup expenses, operating expenses, administration, custodian, trustee, valuation, legal expenses, taxes and performance fee/carry. Check what the fund pays versus what the manager keeps.
Why it matters: Small percentage differences compound over multi-year fund lives and can materially reduce net IRR.
Evidence to request: PPM fees and expenses table
13. Model the distribution waterfall
SEBI requires AIF PPMs to include a detailed example showing fees, charges and the distribution waterfall. Rebuild that example yourself.
Why it matters: The sequence of return of capital, preferred return/hurdle, GP catch-up and carried interest determines how gains are divided.
Evidence to request: PPM waterfall example
14. Check hurdle rate, catch-up and carried interest
A hurdle is not always the investor return you receive before the manager earns carry. Understand whether it is hard or soft, simple or compounded, and whether catch-up lets the manager quickly receive a larger share after the hurdle.
Why it matters: Two funds advertising ‘20% carry over an 8% hurdle’ can produce different investor outcomes because the waterfall mechanics differ.
Evidence to request: PPM, contribution agreement
15. Review fund tenure and extension clauses
Category I and II AIFs are generally close-ended, with a minimum three-year regulatory tenure. Many schemes run much longer.
Check base tenure, permissible extensions, investor-consent thresholds and what happens after the scheduled maturity.
Why it matters: A stated five-year fund can become a seven- or eight-year economic commitment if exits take longer than expected.
Evidence to request: PPM tenure and extension clause
16. Understand exit and liquidity restrictions
Check whether units can be transferred, whether manager approval is needed, whether the fund can reject a buyer, and whether a realistic secondary market exists.
Why it matters: Treat AIF units as generally illiquid. A theoretical transfer right is not the same as daily liquidity.
Evidence to request: Contribution agreement, transfer section
17. Review portfolio concentration limits
Look beyond regulatory ceilings and examine the PPM’s own issuer, sector, geography and group limits. Ask what the portfolio could look like at maximum concentration.
Why it matters: A fund owning ten companies can have very different risk from one owning forty, even if both are described as diversified.
Evidence to request: PPM investment restrictions, portfolio report
18. Analyse leverage and borrowing
For Category III, understand permitted leverage, sources of leverage, derivative exposure, margin requirements and stress controls. Category I/II generally have tighter restrictions on borrowing/leverage, subject to regulatory exceptions.
Why it matters: Leverage can magnify losses and create forced-liquidation risk even when the underlying thesis is eventually correct.
Evidence to request: PPM leverage policy, risk report
19. Test the valuation policy
Ask who values unlisted or illiquid assets, which valuation guidelines are followed, how frequently values are updated and how disagreements are handled.
Why it matters: Category I/II investments are generally subject to independent valuation at least every six months, while Category III NAV calculation must be independent of the fund-management function and disclosed at prescribed intervals.
Evidence to request: Valuation policy, independent-valuer report
20. Review conflicts, related-party deals and side letters
Ask whether the manager, sponsor, affiliates or other managed funds can transact with the AIF or portfolio companies. Review differential rights and side-letter policy.
Why it matters: Conflicts may affect deal allocation, exit timing, fees, co-investment access, and economic rights. SEBI’s framework emphasises pro-rata/pari-passu treatment, subject to applicable exceptions.
Evidence to request: PPM conflict section, side-letter disclosure, related-party policy
21. Check the key-person clause and team stability
Identify the people whose continued involvement is fundamental to the fund. Understand what happens if one or more key investment professionals leave or no longer devote sufficient time.
Why it matters: The investor is underwriting people as much as the legal vehicle. A key-person event should have a clear governance response.
Evidence to request: PPM key-person / investment-team provisions
22. Verify governance and service providers
Review the trustee/board structure, custodian, administrator/RTA, auditor, valuer and investment committee. SEBI’s 2026 framework requires appointing a registered custodian before the scheme’s first investment.
Why it matters: Independent service providers reduce operational and valuation conflicts, although they do not remove investment risk.
Evidence to request: PPM, custodian appointment, audited statements
23. Check PPM compliance and audit history
Ask whether the scheme’s PPM-compliance audit has identified deviations and whether corrective actions were required. SEBI generally mandates an annual audit of compliance with PPM terms, subject to specified exemptions.
Why it matters: This helps determine whether actual fund operations match the promises made to investors.
Evidence to request: Annual PPM audit report/manager confirmation
24. Understand taxation before you sign
Category I and II AIFs fall within Section 115UB’s investment-fund pass-through framework for non-business income; tax generally follows the character of the underlying income in the investor’s hands.
Business income is treated differently. Category III does not fall within the same Category I/II definition under Section 115UB.
Why it matters: The same pre-tax IRR can produce very different after-tax results depending on asset type, holding period, investor status and fund structure. TDS is also not necessarily the final liability.
Evidence to request: PPM tax section, Section 115UB, tax adviser
25. Read the downside clauses: defaults, winding up and unresolved assets
Understand what happens if portfolio assets cannot be sold before fund maturity, investors default on commitments, the fund enters liquidation/dissolution, or the manager seeks an extension.
Why it matters: The hardest part of private-market investing often comes at the end of a fund, not the beginning. Exit mechanics deserve the same attention as the entry thesis.
Evidence to request: PPM termination/winding-up section, contribution agreement
How to Read an AIF PPM Without Getting Lost
A PPM can easily run dozens or hundreds of pages, but an investor doesn’t need to read every clause with the same intensity. Start by mapping the document into decision blocks.
| PPM Section to Focus On | What You Are Trying to Learn | Questions to Ask |
| Fund structure and timeline | Corpus, closings, commitment period, tenure, extensions | When does my commitment become binding? When can deployment stop? |
| Investment strategy | Eligible assets, sectors, geography, concentration, leverage | What is the fund’s maximum risk capacity? |
| Manager/team track record | Relevant prior funds and decision-makers | Who actually generated the historical numbers? |
| Fees and expenses | Every rupee charged to fund/investor | What is the total cost in low, base, and high-return scenarios? |
| Distribution waterfall | Return of capital, hurdle, catch-up, carry | At what gross return does the manager begin earning carry? |
| Conflicts and differential rights | Affiliates, side letters, co-investments | Could another investor or affiliated fund receive better economics or access? |
| Valuation | Method, frequency, independent valuer | How much performance depends on unobservable marks? |
| Risk factors | Strategy-specific downside | Which three risks could permanently impair capital? |
| Tax | Expected character of income | What could my after-tax cash flows look like? |
| Winding up / termination | Unrealised assets, extensions, dissolution | What happens if exits are not completed by maturity? |
SEBI’s current framework requires a standard PPM template for most AIF schemes, with separate templates for Category I/II and Category III.
For the wider regulatory context behind PPM disclosures, valuation, custody and investor protections, review our guide to SEBI regulations for PMS and AIF.
The PPM must include a detailed tabular example of fees, charges and the distribution waterfall. Most AIFs are also subject to an annual audit of compliance with PPM terms, subject to specified exemptions.
AIF Performance Metrics: IRR Is Only the Starting Point
A private-market AIF often receives and returns money on irregular dates. That is why IRR is common. But IRR alone cannot tell you whether the fund’s reported value has actually been converted into cash.
| Metric | Meaning | Simple Formula / Interpretation | Why It Matters |
| IRR | Annualised return based on timing of cash flows | Discount rate that makes net present value of all cash flows zero | Useful for private-market funds where capital is called and distributed at different dates |
| Gross IRR | Return before fund-level fees/carry, depending on reporting convention | Portfolio/deal economics before specified investor costs | Can look materially better than what an investor actually earns |
| Net IRR | Return to investors after fund-level fees/carry and expenses included in the calculation | Investor cash-flow return | More useful for comparing actual investor economics |
| MOIC | Multiple on invested capital | Total value / invested capital | Easy to understand but ignores time |
| DPI | Distributions to paid-in capital | Cumulative distributions / paid-in capital | Shows how much cash has actually come back |
| RVPI | Residual value to paid-in capital | Remaining NAV/paid-in capital | Shows how much value is still unrealised |
| TVPI | Total value to paid-in capital | DPI + RVPI | Shows realised plus unrealised value; high TVPI with low DPI may rely heavily on valuations |
For a mature private-equity or venture-capital fund, DPI can be more revealing than a high headline IRR. A 2.0x TVPI with only 0.3x DPI means most value is still unrealised.
An investor should then study the valuation methodology, portfolio maturity and exit pipeline.
For private-credit AIFs, analyse realised credit losses, restructurings, extensions and recovery rates in addition to IRR.
For Category III funds, the relevant lens may shift toward drawdown, volatility, Sharpe/Sortino ratios, leverage, liquidity and benchmark-relative performance.
Worked Example: Why Gross IRR and Net IRR Can Feel Very Different
Assume an AIF invests ₹100 of investor capital and produces ₹160 of gross value over the fund life. The headline gross MOIC is 1.60x. That does not mean the investor receives ₹160.
Management fees, operating expenses and carried interest reduce distributable value.
The timing of each cash flow also affects IRR. A fund can therefore show a strong portfolio-level gross IRR while the investor’s net IRR is materially lower.
That is why you should ask the manager to provide both gross and net fund performance using a consistent methodology, then rebuild the fee waterfall from the PPM in a simple spreadsheet.
Fees, Hurdle and Carry: The Section Most Investors Underestimate
AIF costs aren’t always captured in a single expense ratio. Management fees can be charged on commitments during the investment period and on invested capital or NAV later.
Fund expenses can include legal, administration, audit, custody, valuation and broken-deal costs. Performance fees or carried interest can then apply after the agreed waterfall conditions are met.
A hurdle rate can be hard or soft. A catch-up provision can allow the manager to receive a large share of distributions after investors receive the preferred return.
Carry can be calculated on a whole-fund basis or through deal-level mechanics, depending on the structure.
Do not rely on labels. Ask for a worked ₹1 crore example showing low-return, base-return, and high-return scenarios. If the manager cannot explain the waterfall in plain English, the investor has not completed due diligence.
Valuation: The Most Important Number You Cannot See Trading on an Exchange
Unlisted portfolio values deserve special attention because they can materially affect IRR, TVPI and the apparent smoothness of returns.
SEBI requires Category I and Category II AIFs to have an independent valuer value investments at least once every six months. With approval of at least 75% of investors by value, the interval can be extended to one year.
For Category III AIFs, NAV calculation must be independent of the fund-management function.
NAV must be disclosed at intervals no longer than a quarter for closed-end funds and no longer than a month for open-ended funds.
From 2026, AIF unit values will also be reported to the depository infrastructure based on the latest available valuation, improving operational transparency.
Still, a displayed NAV depends on the valuation methodology and accounting practices of the particular AIF.
When examining a portfolio company, ask whether the valuation is based on a recent third-party transaction, public-market multiples, discounted cash flow, comparable companies, independent appraisal or another method.
Then ask what would happen to the reported fund return if the largest three unrealised positions were marked down by 20%.
Conflicts, Side Letters and Co-Investment Rights
Alternative funds frequently manage multiple pools of capital. The same manager may operate Fund I, Fund II, a credit vehicle, a co-investment vehicle and separately managed mandates.
This can create legitimate commercial efficiencies-but also allocation conflicts.
Review how the manager decides which fund receives an investment, follow-on opportunity or exit.
Ask whether some investors receive fee discounts, enhanced information, transfer rights, advisory-committee seats or co-investment access through side letters.
SEBI’s framework addresses pro-rata and pari-passu rights and requires disclosure of any differences, subject to applicable exemptions.
The investor’s goal is not to eliminate every difference, but to understand whether another investor’s rights can adversely affect your economic or governance position.
Taxation: Compare After-Tax Cash Flows, Not Only Pre-Tax IRR
For Category I and Category II AIFs, Section 115UB broadly provides pass-through treatment for non-business income.
In effect, the investor is generally taxed as though the underlying eligible income arose directly to the investor, while preserving the income’s nature.
Business income is an important exception and is taxed under the applicable fund-level framework.
A tax clarification effective from 1 April 2026 treats qualifying securities held by Section 115UB investment funds under the regulatory framework as capital assets, providing greater certainty that transfer gains on those securities are treated as capital gains.
Section 194LBB generally requires 10% TDS on covered income for resident unit holders; withholding for non-residents follows the applicable rates in force, subject to chargeability and treaty provisions.
TDS is not necessarily the final tax liability. Category III AIFs are not included in Section 115UB’s Category I/II definition of an ‘investment fund’.
Their tax treatment therefore depends on the vehicle’s legal structure, the character of income and prevailing tax law.
Investors should seek fund-specific tax advice rather than automatically applying the Category II pass-through logic.
For a deeper category-by-category treatment of pass-through taxation, Category III taxation and TDS, see our PMS/AIF taxation guide for FY 2026-27.
25 Questions to Ask the AIF Manager Before Signing
- What percentage of your previous fund’s TVPI has actually been distributed as DPI?
- What are the three biggest losses or write-offs across the team’s historical funds, and what caused them?
- Please show gross IRR and net IRR for each prior fund using the same methodology.
- How much of the current track record is unrealised?
- Which members of the current investment committee generated the prior track record?
- What is the maximum exposure to one company, promoter group, sector and geography?
- What fees and expenses are charged outside the headline management fee?
- Can you walk me through the PPM waterfall with a ₹1 crore investor example?
- Is the hurdle hard or soft, and is there a full GP catch-up?
- What is the manager/sponsor’s actual cash commitment?
- What situations can trigger a key-person event?
- Can the investment period continue during a key-person event?
- What differential rights or side letters have been granted to other investors?
- Can any other fund managed by your group invest before, alongside or after this scheme in the same asset?
- How are co-investment opportunities allocated?
- Who values the portfolio, and how often?
- What was the largest valuation write-down in a prior fund?
- How often have earlier funds extended their stated tenure?
- What percentage of prior exits required restructuring, refinancing or litigation?
- For Category III, what is the maximum expected gross and net leverage?
- How is the fund benchmarked, and what is the relevant vintage peer group?
- What tax character do you expect the major return components to have?
- Can you provide the latest audited financial statements and the PPM compliance audit status?
- What happens to remaining assets if they cannot be sold before the fund ends?
- What specific event would make you stop deploying capital even if commitments remain available?
10 Red Flags That Deserve Extra Investigation
| Red Flag | What to Do |
| Only gross returns are shown | Ask for net IRR, DPI and actual investor cash-flow history. |
| The manager highlights one successful deal instead of fund-level results | Request complete prior-fund performance including losses and write-offs. |
| High TVPI but very low DPI in an older fund | Most performance may still depend on unrealised valuations. |
| Waterfall description is difficult to reproduce | Do not invest until fees, hurdle, catch-up and carry can be modelled clearly. |
| Track record belongs mainly to people who have left | Assess the current team, not only the brand’s historic numbers. |
| Frequent prior-fund tenure extensions | Investigate exit quality and whether assets are being marked rather than realised. |
| Side letters are described vaguely | Ask what economic, information, transfer or co-investment rights differ among investors. |
| A ‘secured’ or ‘protected’ strategy is marketed as low risk | Analyse legal enforceability, collateral quality and recovery history. |
| Target IRR is presented as expected or assured return | Treat target IRR as an objective, not a promise. |
| Tax is summarised as one universal rate | AIF tax depends on category, income character, holding period and investor profile. |
A Simple Decision Process for an HNI
Step 1: Decide the portfolio role before choosing a fund. Are you seeking private equity growth, private credit income, real estate exposure, tactical trading or another alternative return source?
Step 2: Set an illiquidity budget. Decide how much of your investable assets can remain unavailable for several years without affecting family goals, emergency liquidity or future commitments.
Step 3: Compare only like-for-like funds. Match category, strategy, vintage and maturity rather than creating a single ‘best AIF’ league table.
Step 4: Verify the manager through realised evidence. Focus on net IRR, DPI, write-offs, recoveries and prior-fund extensions-not only the most successful deal.
Step 5: Model fees and tax. Convert gross performance into an illustrative after-fee, after-tax cash-flow picture.
Step 6: Read the legal downside. Understand capital-call default remedies, key-person events, transfer restrictions, tenure extensions, winding up and treatment of unresolved investments.
Step 7: Invest only when you can explain the strategy and its failure modes in your own words.
Frequently Asked Questions
What is the minimum investment in an AIF in India?
For a standard AIF investor, the headline regulatory minimum is ₹1 crore, subject to specified exceptions. Accredited-investor structures can have different regulatory treatment. Always check the current scheme documents.
Is the ₹1 crore amount paid on day one?
Not necessarily. Many closed-ended AIFs use commitments and capital calls. You may commit ₹1 crore and fund it in instalments as the manager deploys capital.
What is the most important AIF document to read?
The PPM is the primary disclosure document. The contribution agreement is equally important because it contains the investor’s binding contractual obligations, transfer restrictions, default remedies and other legal terms.
Is a high IRR enough to select an AIF?
No. First determine whether the IRR is gross or net, realised or partly unrealised, which vintage it belongs to, and how much cash has actually been distributed.
What is the difference between DPI and TVPI?
DPI measures cash already distributed relative to paid-in capital. TVPI combines distributed value and remaining portfolio value. A fund can have strong TVPI but weak DPI if most of the value remains unrealised.
Why is vintage year important?
Private-market opportunity sets and valuations change dramatically across cycles. Funds started in different years should not be compared as though they faced the same entry prices and exit markets.
Are Category II AIFs tax pass-through?
Section 115UB broadly gives Category I and Category II investment funds pass-through treatment for non-business income, so income is generally taxed in the unit holder’s hands according to its character. Business income is treated differently.
Does Category III get the same Section 115UB treatment?
The Section 115UB definition of investment fund covers Category I and Category II AIFs, not Category III. Category III tax outcomes depend on the fund’s legal structure, income and applicable tax law.
How often are AIF portfolios valued?
Category I and II AIF investments are generally valued by an independent valuer at least once every six months, which may be extended to one year with the required investor approval.
Category III NAV must be independently calculated and disclosed no less frequently than quarterly for closed-end funds and monthly for open-ended funds.
Can AIF units be sold before maturity?
Transfers may be possible under the fund documents and applicable rules, but liquidity is usually limited. Investors should not assume a buyer will be available at NAV.
What is a key-person clause?
It defines what happens if specified investment professionals leave, die, become unavailable or stop devoting the required time. Depending on the documents, it can suspend new investments or trigger investor/committee action.
What is a side letter?
A side letter is an agreement that grants particular rights or terms to a specific investor, such as information rights, fee terms, transfer rights, or co-investment access, subject to the regulatory framework.
What is an AIF PPM audit?
It is an annual audit of compliance with the PPM terms, generally required by SEBI, subject to specified exemptions.
The purpose is to check whether the fund has operated consistently with the commitments and disclosures in its PPM.
Should I choose the AIF with the lowest fee?
No. Cost matters, but manager quality, realised performance, downside control, strategy capacity, governance, and liquidity matter too. Compare net outcomes rather than the headline management fee alone.
What is the single best question to ask an AIF manager?
Ask the manager to explain the worst investment outcome in the team’s history, what happened, how much capital was recovered, and what changed in the underwriting or investment process afterwards.
Conclusion: The Best AIF Due Diligence Starts with Downside, Not Target IRR
Investing ₹1 crore in an AIF is not simply buying a high-return financial product. It is entering a long-term legal and economic partnership with a manager whose decisions can affect your capital for many years.
The strongest AIF due diligence process therefore works backwards from what can go wrong.
Who controls the money? How can valuations change? How much of the track record is realised? What happens when exits are delayed? Who gets paid first?
What happens if the key manager leaves? How will taxes affect distributions? And what rights do other investors have that you do not?
If you answer those questions clearly, target return becomes one input among many.
If they are not, a high target IRR should not compensate for weak governance, unclear fees, poor liquidity or an unproven investment process.
For HNIPortfolio, this checklist can also serve as a standard framework for future AIF reviews, so every fund is analysed using the same core questions rather than a different marketing narrative.
If you are still deciding whether an AIF is the right investment structure, compare it with PMS and mutual funds before moving from due diligence to product selection.
Disclaimer: This guide is an educational due-diligence framework, not a recommendation to invest in any AIF. AIFs are complex, high-value investments. Obtain legal, tax, and investment advice for the specific fund and investor.