Cat-III AIFs post industry-beating growth for third year in a row

Commitments raised, other parameters have grown faster than other AIF categories

Category III (Cat-III) alternative investment funds (AIFs) have outpaced other segments of the AIF industry for the third year in a row. Cat-III AIFs are a key investment avenue for wealthy investors, which allow the use of complex strategies to generate market-beating returns.

 

Cat-III AIFs recorded a 36.9 per cent year-on-year (Y-o-Y) increase in commitments to touch ₹3.1 trillion as of financial year 2025-26 (FY26), compared to a 25.6 per cent growth recorded by AIFs overall (₹16.9 trillion), according to recently released regulatory data. Cat-III “funds raised”, which reflect the commitments that have come into the scheme, rose 35.5 per cent Y-o-Y to nearly ₹2 trillion in FY26, while investments made from these funds grew 30.8 per cent to ₹2.1 trillion in the same period. Funds raised and investments made for the AIF industry overall grew at 25-26 per cent in FY26. Both funds raised and investments made by Cat-III AIFs have also beaten overall AIF industry growth for the third year in a row.

 

This gains significance in light of the loss of traction for a key Cat-III strategy that allows investors to potentially make money whether markets rise or fall, popularly called long-short funds. Long-short funds lost traction following the introduction of specialised investment funds (SIFs) in September 2025. SIFs offer the same strategies in a more tax-advantaged manner, and typically at a lower ticket size of ₹10 lakh, with exceptions only allowed for accredited investors. All AIFs also similarly allow exceptions for accredited investors but require a minimum investment of ₹1 crore. Cat-I AIFs invest in startups, infrastructure, and other segments, while Cat-II AIFs include segments like private equity.

 

According to industry sources, the growth in Cat-III AIFs, despite some long-short funds reportedly shutting down with the advent of SIFs, has been driven by growth in other Cat-III sub-segments and a surge in long-only funds, which bet strictly on market upside.

 

"Most of the pre-IPO (initial public offering) funds are operating under Cat-III instead of Cat-II," said Daniel GM, founder-director at alternatives-tracker PMS Bazaar. This increasing shift of pre-IPO schemes towards Cat-III provides flexibility, with many Cat-III funds maintaining a 49 per cent limit on unlisted securities, keeping open the option to invest the remaining in listed securities, he said. Multi-strategy is another emerging theme under Cat-III, which invests in segments including debt, derivatives, and cash market equity securities under one fund, Daniel GM added.

 

Sushant Bhansali, chief executive officer (CEO) of Ambit Asset Management, said that long-short funds now account for only a handful of Cat-III AIFs. Performance and tax considerations have both been a drag for the segment. The category does not have pass-through status, meaning investors only get returns after taxes are deducted at the fund-level. This is unlike mutual funds or SIFs where there are no taxes at the fund-level, and the tax is paid by the investor on redemption. Long-only funds have been a key growth driver for Cat-III AIFs.

 

Much of the recent asset growth for the long-only segment also reflects portfolio management service (PMS) providers who have opted for opening new AIFs. The shift is despite the fact that the tax structure is more favourable to investors in a PMS scheme, which also has relatively limited investment restrictions.

 

The move to AIF schemes by PMS players is to benefit from the pooled structure that long-only Cat-III AIFs can provide. Cat-III AIFs are easier to manage than the PMS structure, which requires shares to be held in the individual demat accounts of each investor. Faster growth for Cat-III AIFs currently being driven by the shift will also likely persist as the segment matures, according to Bhansali. "Many PMS players have opened AIFs... this will continue," he said.

 

The PMS industry’s assets grew 9.6 per cent in FY26 to ₹41.4 trillion (including retirement assets), compared to 13.9 per cent in FY25 (₹37.8 trillion).