AIF lift beckons: Domestic institutions can unlock next level of growth

AIF lift beckons Domestic institutions key to unlocking next level of growth for the industry and, thereby, the economy

Private markets — where capital is raised and invested outside the stock and bond markets — have staged a feat of sorts in India over the past decade, surging on tailwinds such as growing wealth, shifting investor preferences and supportive policies, which are expected to sustain growth for years to come. 

Private market investments almost quadrupled to ₹4.68 trillion in 2024 from ₹1.26 trillion in 2015 and had hit a peak of ₹ 5.67 trillion in 2021 amid the heightened risk aversion during the pandemic. 

And despite external headwinds such as US tariffs, deal values in the first nine months of 2025 remained resilient, dipping only 5.3 per cent from the previous year, underpinned by consumption-led growth and proactive government policies. 

A crucial component of this growth are the alternative investment funds (AIFs), which have crested the wave on their better risk-return profiles, portfolio diversification, rising investor awareness, and a supportive regulatory environment. 

 As of September 2025, over 1,600 AIFs were registered in the country, with more than 60 per cent registering in the past four and a half years. 

Category I and II AIFs have seen their share in total private market investment increase steadily from 4.6 per cent in 2015 to 16.4 per cent in the first nine months of 2025. 

Category I AIFs invest in start-ups, early-stage ventures, social ventures, small and medium enterprises, infrastructure, or other sectors and areas that the government or regulators deem socially or economically desirable. 

Category II AIFs employ a broad range of investment strategies, investing in unlisted and listed securities, debt instruments, real estate, infrastructure, and distressed assets. 

Total commitments to AIFs clocked a compound annual growth rate of 31.5 per cent between financial years 2021 and 2025, indicating growing interest in these investment vehicles. 

Small wonder, AIFs are among the fastest-growing managed products in the financial sector today. 

High-net-worth individuals (HNIs) and family offices are the major investors in AIFs, seeking alpha and diversification opportunities in India’s vibrant private markets and startup ecosystem. According to the Hurun Global Rich List 2025, India ranks third globally in billionaire count with 284 individuals, 175 of whom have seen their wealth increase over the past year. 

But the bigger spur is coming from rising government-backed institutional participation, which is lending credibility and momentum to the sector. 

AIFs offer an ideal option for domestic institutional investors (DIIs) to tap into private markets, thanks to their professional management, diversification benefits and regulatory oversight. 

As DIIs begin to relax their investment guidelines, even partial participation could spark the next phase of growth in AIFs and private markets, bringing in long-term patient capital essential for supporting entrepreneurs and fostering innovation, as well as delivering superior risk-adjusted returns over time. 

Currently, DIIs contribute a relatively small portion of annual investments to alternative assets. However, this is set to change with growing support from regulatory bodies and industry initiatives. 

Domestic institutions have committed ₹24,293 crore to various initiatives, including the Research, Development and Innovation Scheme, which aims to catalyse private research and development investment with an outlay of ₹1 trillion over the next six years.The convergence of rising domestic wealth, increasing institutional participation, innovative investment strategies and robust regulatory support will accelerate growth in AIFs and private markets, as well as enhance returns and diversification. 

It will also play a pivotal role in nation-building, supporting India’s entrepreneurial ecosystem and economic ambitions.