The search for yield looks very different when the portfolio is large.
A few extra basis points on a fixed deposit or a highly rated bond may improve headline returns, but they rarely change the outcome meaningfully for a sizeable corpus. That is why a growing part of the fixed-income conversation in India is moving beyond conventional debt and towards private credit.
The appeal is not simply higher yields. Private credit gives investors access to lending opportunities where capital is scarce, structures are negotiated directly, and returns are designed to compensate for the complexity and risk involved. Depending on the borrower and structure, opportunities can target gross IRRs of roughly 14% to 20%. For investors capable of evaluating credit quality, downside protection, and liquidity, India’s evolving private credit market deserves a closer look.
Private credit refers to debt financing provided by non-bank institutional investors outside of public capital markets. Borrowers are typically mid-market businesses, growth-stage companies, or real estate developers who need capital at a scale and speed that regulated banks cannot match.
The instruments vary. Secured non-convertible debentures (NCDs), optionally convertible debentures (OCDs), and structured debt with equity kickers are the most common forms in the Indian context. What they share is a bilateral structure: no secondary market, and terms negotiated directly between lender and borrower.
For an HNI investor, access comes primarily through Category II AIFs under SEBI. These funds pool capital from qualified buyers, deploy it across a portfolio of credit opportunities, and return principal and interest as borrowers repay. The minimum ticket is Rs 1 crore.
India’s credit gap is well-documented. The banking sector, constrained by priority sector lending requirements and risk aversion toward mid-market borrowers, leaves a significant portion of credit demand unmet. This is a structural feature of how the Indian financial system operates, not a short-term gap.
Banks prioritize large corporate and retail lending. The mid-market navigates a narrow corridor. Private credit funds fill precisely this corridor, pricing risk through covenants, security structures, and yield premiums rather than blanket rejection.
The 2026 macro environment adds support. With the RBI’s rate easing cycle underway and PLI momentum accelerating domestic manufacturing, demand for mid-market growth capital is rising. This is structural, not speculative.
Private credit funds under Category II are closed-ended with typical tenures of 5 to 7 years. Capital is called in stages as the manager underwrites opportunities. You do not transfer your full commitment on day one. As individual loans mature, the fund distributes principal and interest through a waterfall model across the fund’s life.
Your return is measured by the IRR, which accounts for the timing of each cash flow. The manager’s performance fee is tied to a hurdle rate of 10% to 12%, with carried interest of 20% above that threshold. The manager earns upside only after you have received your preferred return.
| Feature | Private Credit (Category II AIF) | Listed NCDs | Bank FDs |
| Typical Gross Yield | 14% to 20% IRR | 7% to 9% | 6.5% to 7.5% |
| Security | Mortgages, pledged shares, guarantees | Varies | DICGC up to Rs 5 lakh |
| Liquidity | 5 to 7 year lock-in | Listed; tradeable | Premature exit with penalty |
| Tax Treatment | Pass-through; taxed at your slab | Taxed at slab | Taxed at slab |
| Minimum Investment | Rs 1 crore | Varies | None |
The yield differential is the central argument. A well-managed private credit fund targets an IRR 700 to 1000 basis points above comparable public market debt. Over a 5-year fund life, this compounding gap on a Rs 1 crore commitment is material.
The trade-off is liquidity. Your capital is locked in for the fund’s duration. This is not a structural flaw; it is the source of the premium. The illiquidity premium is real and persistent precisely because most investors are unwilling to accept the lock-in.
Not all private credit funds are built alike. Before committing, assess these markers.
Collateral quality. First-charge mortgages over operating real estate, pledged promoter equity, and personal guarantees signal a manager who has structured for downside protection. Second-charge or unsecured structures carry materially higher risk.
DPI track record. For managers with prior vintages, DPI (Distribution to Paid-In capital) is the most honest performance measure. An IRR is a projection until realized; DPI tells you how much actual cash has been returned to investors.
Portfolio diversification. A fund investing across 20 to 30 credits in different sectors manages risk far better than one with fewer, concentrated bets. Review the PPM (Private Placement Memorandum) for stated borrower concentration limits.
Manager expertise. Credit underwriting is a distinct discipline from equity investing. Look for teams with structured finance, credit analysis, or NBFC lending backgrounds.
India’s ambition toward a developed economy by 2047 will not be funded by public markets alone. The mid-market businesses forming the backbone of the Amritkaal era require structured debt capital at every growth stage. Private credit is the bridge between their capital needs and investors who can responsibly meet them.
For an HNI already participating in India’s equity story through a PMS or AIF, private credit introduces a yield-generating, non-correlated layer that does not move with equity market levels. It adds stability to a portfolio that may otherwise depend almost entirely on market sentiment.
At Carnelian Asset Management, we believe long-term wealth creation requires thoughtful asset allocation across the full capital structure. While equity remains a core engine for wealth generation, understanding how private credit complements equity risk is essential for building a resilient Amritkaal portfolio. If you are evaluating how to structure your multi-asset strategy, contact our team to discuss an allocation framework aligned with your investment goals.
