Alternative Investment Funds vs Mutual Funds

AIFs (Alternative Investment Funds) are private funds investing in non-traditional assets like private equity and hedge funds, are typically for accredited investors, and have higher fees and longer lock-in periods, while mutual funds are publicly offered, invest in traditional assets like stocks and bonds, have lower minimum investments, and offer greater liquidity. The primary differences are in accessibility, asset type, liquidity, costs, and investor suitability.
EXPLORE FUNDS
Difference Between Alternative Investment Funds and Mutual Funds
EXPLORE FUNDS
3 min
17-December-2025

The fundamental difference between alternative investment funds vs mutual funds lies in their accessibility and minimum investment amounts. AIFs can be made available only to accredited investors and HNIs as they involve high minimum investment amounts.

Mutual funds, on the other hand, are available to a broad segment of the Indian population. The minimum investment amounts are also quite low, so the entry barrier is lower compared to AIFs.

In this article, we will understand alternative investment and mutual funds and the difference between AIF vs mutual funds.

What are alternative investment funds?

An alternative investment fund is a private fund designed for a small group of HNIs or sophisticated investors with a high-risk tolerance in exchange for higher returns.

These funds are regulated by SEBI and are not subjected to the same rules and frameworks as mutual funds. AIFs come with longer maturity periods, so your funds will not be easily accessible. However, in exchange for this, individuals get to invest in distinct and potentially profitable investment opportunities that will not be available to the public at large.

Alternative investment funds include a variety of investment vehicles, such as hedge funds, private equity funds, venture capital funds, real estate investment trusts (REITs), infrastructure investment trusts (InvITs), commodity funds, and distressed debt funds.

What are mutual funds?

Mutual funds are a type of investment where individuals contribute to pool money, which fund managers then use to invest in financial instruments like stocks, equities, commodities, and bonds. Mutual funds are professionally managed funds in which each investor owns a percentage of the fund’s holding, denoted by units proportional to their investment amount.

The aim of the portfolio manager here to help investors earn an income or generate capital gains after taking into account your investment objectives and risk appetite.

Mutual funds are also strictly regulated by SEBI (or the Securities and Exchange Board of India) to protect investors and ensure the process remains safe and transparent.

Mutual funds have become a popular investment vehicle for many Indians, as they are a great way to diversify your portfolio, can be bought and sold easily to provide liquidity, and do not require very sophisticated knowledge. Hence, they are a good option for both beginners and experienced investors. Read more about, What is a mutual fund.

Alternative investment funds vs Mutual funds

Here are some of the differences between AIF vs mutual funds:

Aspect

Alternative investment funds (AIFs)

Mutual funds

Meaning

Investment vehicles meant for accredited investors and HNIs due to high entry requirements

Investment options open to retail, HNI and institutional investors

Target investors

Primarily high-net-worth individuals and institutions

Suitable for the general investing public

Types of investments

Private equity, real estate, hedge funds and other alternative assets

Equities, debt instruments and money market securities

Regulation

Regulated by SEBI under AIF regulations with relatively fewer constraints

Strictly regulated by SEBI with strong investor protection norms

Risk level

Higher risk due to exposure to illiquid and alternative assets

Generally lower risk due to diversification and liquidity

Minimum investment

High minimum investment thresholds, limiting access

Low minimum investment amounts, accessible to most investors

Liquidity

Limited liquidity because of long lock-in periods and illiquid assets

High liquidity, especially in open-ended schemes

Return potential

Higher return potential with higher risk

Moderate and relatively stable returns

Transparency

Lower disclosure and reporting transparency

High transparency with regular disclosures

Investment horizon

Long-term focus on niche or specialised opportunities

Suitable for both short-term and long-term goals

Fund structure

Privately structured funds with a limited number of investors

Publicly offered funds with no cap on investor count

Tax treatment

Varies based on AIF category and structure

Standardised taxation based on equity or debt rules

Benchmarking

Typically aims for absolute returns without index benchmarking

Benchmarked against indices such as Nifty or Sensex

Exit options

Restricted exits due to lock-ins

Flexible exit options with daily redemptions

Fee structure

Higher fees including performance-linked charges

Lower expense ratios compared to AIFs

Fundraising method

Private placement from HNIs and institutions

Public fundraising through retail and institutional channels

Market influence

Less directly impacted by stock market movements

Closely linked to market performance and volatility

Regulatory oversight

Operates under broader regulatory guidelines

Operates under stringent and detailed regulatory oversight

Who can invest in alternative investment funds?

Since AIF vs mutual funds are two completely different financial instruments, they also cater to different kinds of investors. SEBI has laid down certain guidelines investors must follow before investing in AIFs. Let us understand the ideal profile of an AIF investor:

The investor can be an Indian national, and if not (a non-resident Indian or a foreigner), they can only invest in equity.

A minimum amount of Rs. 1 crore must be invested in an AIF by an investor.

If an individual happens to be either an employee, fund manager or at the director level, then the minimum amount for them is Rs. 25 lakhs.

An AIF must have a minimum corpus of Rs. 20 crore to make all individual investors eligible to invest.
The maximum number of investors in an AIF scheme cannot be more than 1000.

Who can invest in mutual funds?

The criteria for investing in mutual funds are not as stringent as AIFs. As defined by SEBI, here are some of the rules and regulations regarding mutual funds:

All Indian citizens and non-resident Indians can invest in mutual funds. Foreigners can not make use of SIPs or STPs.

Different mutual funds have different minimum investment amounts, but you can easily find mutual funds that let you invest with a minimum amount of Rs. 500.

Are you curious about your mutual fund SIP investment's growth potential? Try our free mutual fund calculator to forecast your maturity amount accurately.

Are mutual funds alternative investments?

Even though the end goal of mutual funds and alternative investment funds is the same, they are not similar for several reasons. Some of these are:

Alternative investment funds

Foreigners can invest only in equity

Minimum investment requirement: Rs. 1 crore

Minimum corpus: Rs. 20 crore

Maximum number of investors per scheme: 1000

Designed for sophisticated investors with a high net worth

Mutual funds

Foreigners cannot use SIPs or STPs

Minimum investment requirement: Rs. 500

Minimum corpus: Rs. 1 crore (typically)

No limit on the number of investors

Suitable for any retail investor, regardless of portfolio size

How to invest in alternative investment funds (AIFs)?

Investing in Alternative Investment Funds (AIFs) in India involves a structured process. Below are the key steps to follow:

Step 1: Choose the right AIF category

  • Category I AIFs: Focus on sectors such as start-ups, infrastructure and social ventures.

  • Category II AIFs: Include private equity, private debt and real estate funds.

  • Category III AIFs: Use complex trading strategies, such as hedge funds, aiming for short-term returns.

Step 2: Evaluate the fund details
Review the fund’s investment strategy, track record of the fund manager, historical performance, fee structure, lock-in period, exit options and the Private Placement Memorandum (PPM).

Step 3: Ensure SEBI registration
Select an AIF that is registered with SEBI to ensure regulatory compliance and transparency.

Step 4: Complete KYC and documentation
Fulfil KYC requirements and submit documents outlining investment terms and fund structure.

Step 5: Invest the capital
Transfer funds to the AIF’s escrow account. Capital is typically drawn in phases, as per the fund’s capital call schedule.

Should I invest in AIF or mutual funds?

Many investors get confused about which investment avenue—AIF vs mutual funds—would be best for them. Here are some pointers that can help you make an informed decision.

1. Diversification

Both AIFs and mutual funds offer ample diversification to minimise risks and maximise gains. As both deploy funds in multiple asset classes, they help spread risk and reduce the impact of any single asset's poor performance.

2. High ROI vs Low risk

AIF products are not directly linked to the stock market. Hence, they do not see massive fluctuations, making them relatively low-risk investments. Mutual funds, on the other hand, are subject to market risks, making them riskier.

3. Ownership and taxation

These financial instruments give you direct ownership in proportion to your investment amount and tax benefits in the long run.

4. Lock-in period

Mutual funds can broadly be divided into the following types:

Closed-ended funds have a lock-in period of three to five years, during which investors are not allowed to redeem their investments. Open-ended funds have a lock-in period of three years. Other mutual funds do not have such strict lock-in periods.

In the case of alternative investment funds, a lock-in period of three years is prevalent.

5. Easy vs difficult investment

Mutual funds do not have an entry barrier as they can be as low as Rs. 500, making them extremely affordable. AIFs, on the other hand, require a significant investment of Rs. 1 crore, making them accessible to HNIs.

Key takeaways

  • Mutual funds pool money from investors to invest in equity, debt or hybrid assets and include options such as equity funds, debt funds and index funds.

  • Alternative investment funds (AIFs) invest in non-traditional assets like private equity, commercial real estate and start-up equity, with the potential for higher returns.

  • AIFs have high minimum investment requirements and are generally suited for high-net-worth individuals, while mutual funds are affordable and accessible to retail investors.

  • The key differences between mutual funds and AIFs lie in asset classes, investor eligibility, liquidity, volatility and regulatory frameworks.

  • Both mutual funds and AIFs offer distinct benefits, and investors should choose based on their risk appetite and goals while maintaining diversification across market-linked and non-market-linked investments.

Conclusion

Alternative investment funds and mutual funds have their unique benefits and are targeted at different investor profiles. Given our country's population, with people from different socio-economic sections, AIFs and mutual funds play crucial roles in the financial market.

In the case of alternative investment funds vs mutual funds, selecting the right option depends on your capital, investment objective, and future plans.

Essential tools for mutual fund investors

Mutual Fund Calculator Lumpsum Calculator SIP Calculator Step Up SIP Calculator
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Frequently asked questions

What is an alternative investment fund?
An Alternative Investment Fund (AIF) is a privately pooled investment vehicle that allocates capital to alternative asset classes, including private equity, venture capital, hedge funds, real estate, commodities, and derivatives.

What is the difference between AMC and AIF?
A private placement AMC (Actively Managed Certificates) cannot be marketed to the public and is limited in the number of professional investors it can target, depending on its structure and location. In contrast, an AIF can be offered to an unlimited number of professional investors.

Why is PMS better than mutual funds?
Mutual funds provide a diverse selection of stocks and are ideal for investors with smaller portfolios and simpler tax compliance needs. Conversely, Portfolio Management Services (PMS) offer customised portfolios tailored to individual preferences and goals, making them suitable for investors with larger portfolios requiring personalised management.

Why is AIF better than MF?
AIFs primarily cater to affluent investors willing to take on higher risks and employ complex investment strategies. Conversely, mutual funds are designed for general investors seeking diversified and comparatively stable portfolios.

Is AIF tax-free?
Category I and II AIFs enjoy exemption from all tax obligations on investment income or capital gains. However, if the income generated by the fund is classified as business income, it is then taxed at the fund's level.

Is AIF risky?
AIFs include private equity, venture capital, real estate, infrastructure, and commodities. AIFs are typically more complex and risky than traditional investment funds, but they also have the potential to generate higher returns.

What is the difference between mutual funds and alternative funds?
AIFs can be used to achieve various investment objectives, including high returns, capital preservation, or diversification, whereas mutual funds are typically aimed at achieving long-term growth and income.

Who can invest in AIF?
Investors, including Indian citizens, NRIs, and foreign nationals, can diversify their portfolios through AIFs with a minimum investment of Rs. 1 crore (Rs. 25 lakh for directors, employees, and fund managers). AIFs typically have a minimum lock-in period of three years, and the number of investors per scheme is capped at 1000, except for angel funds, which can have up to 49 investors.

What is the advantage of AIF?
AIFs are structured to potentially achieve higher returns than traditional investments. Their utilisation of a wide array of assets and strategies can result in performance independent of stock and bond market fluctuations. Skilful leveraging can enable AIFs to perform strongly even amid market volatility.

What is a category 3 AIF?
Category III AIFs invest in listed and unlisted securities, derivatives, complex products, or other AIF units. They can be open-ended or closed-ended, with a minimum tenure of three years for closed-ended funds. The minimum investment requirement for Category III AIFs is Rs. 1 crore, and they can leverage up to two times their total fund corpus. Taxation of income at the AIF level varies based on the fund's structure as a trust, LLP, or company.

Which investment is 100% tax-free?
Investors have several tax-free investment options to choose from, including life insurance plans, Public Provident Fund (PPF), National Pension System (NPS), five-year bank tax-saver fixed deposits (FD), Employees' Provident Fund (EPF), five-year Post Office Term Deposits, and Senior Citizens Savings Scheme (SCSS).

What is the difference between mutual funds and alternative investment funds?

Mutual funds invest in traditional assets like equities and debt and are easily accessible to retail investors. Alternative investment funds focus on non-traditional assets such as private equity or real estate, require higher investments and are typically suited for high-net-worth investors seeking diversification and higher return potential.

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