For most high net worth investors, the decision to diversify into private markets has already been made. The challenge now lies in the selection process. As the variety of available strategies expands, the level of due diligence required becomes more intense. And the right choice depends on identifying a fund manager whose philosophy aligns with your long term objectives. It requires a clear understanding of how different categories function under the current SEBI framework and how they interact with your existing holdings.
This guide provides a clear approach to evaluating these vehicles to ensure your capital is placed with the most capable managers.
The primary reason to include an AIF in a portfolio is the ability to access institutional grade opportunities that are unavailable in public markets. These funds allow you to participate in the growth of companies during their most productive stages of scaling. By accepting a lock in period, you provide the fund manager with the stable capital needed to implement long term value creation strategies.
In the current Indian economic environment, this often means focusing on sectors like specialized manufacturing or tech enabled services. The focus is on the illiquidity premium, which is the additional return expected for committing capital over a five to seven year horizon.
SEBI divides AIFs into three distinct categories. Choosing the right one is as much a tax decision as it is an investment one.
| Feature | Category I | Category II | Category III |
| Primary Focus | Venture Capital, SME, Social Ventures | Private Equity, Real Estate, Debt Funds | Hedge Funds, Long-Short, PIPE |
| Tax Status | Pass-through (Taxed at your slab) | Pass-through (Taxed at your slab) | Fund-level tax (Max Marginal Rate) |
| Structure | Closed-ended | Closed-ended | Open or Closed-ended |
| Leverage | Not allowed for investment | Not allowed for investment | Allowed within SEBI limits |
Category I and II are generally more tax efficient for individual investors because the fund does not pay tax on capital gains. The tax liability passes through to you, which means you pay the applicable capital gains rate only when the fund realises a profit.
Category III funds are taxed at the fund level as a representative assessee, which is simpler for paperwork but often results in a higher effective tax rate.
When you commit capital to an AIF, you are backing a team and their specific philosophy. Use these markers to filter your options:
AIFs often have a lifespan of 7 to 10 years. Since these are long-term commitments, you should look for Growth Themes that are just beginning to unfold.
For instance, in 2026, the focus has moved toward India’s Amritkaal, the period leading up to 2047. If the macro environment shows a steady decline in inflation and a push for domestic manufacturing (PLI schemes), it is an opportune time to enter Category II Private Equity funds that focus on mid-market manufacturing. Conversely, if you expect high market volatility, a Category III Long-Short fund might be better suited to protect your capital.
At Carnelian, we focus on identifying quality businesses, quality management that are growing but available at a reasonable valuation. Our approach is built on the belief that India’s economic trajectory over the next two decades offers a generational wealth-creation opportunity.
If you are looking for a strategy that is a Flexi-cap portfolio that captures long-term trends across five mega sectors — BFSI, Manufacturing, Consumption, Services Export, and Infrastructure over Amritkaal period (22 years period leading to India’s 100-year celebration in 2047), our Carnelian Bharat Amritkaal Fund is designed for that exact purpose. It targets companies that are poised to be the leaders of a developed India.
Explore the Carnelian Bharat Amritkaal Fund or contact our team of experts today.
