How AIFs Work in India: Units, NAV, Lock-In and Commitment Calls

Most first-time AIF investors arrive knowing two things: there is a ₹1 crore minimum, and there are three categories. Neither tells you what happens after you sign.

Here is the lifecycle in one paragraph. A sponsor sets up the fund, usually as a trust, and registers it with SEBI. The manager files a private placement memorandum (PPM) that sets out the strategy, fees, tenure and rules. You read the PPM, sign a contribution agreement for a committed amount, and wait. Over the next few years the manager sends a capital call each time it needs money for a deal or for expenses. Each call is a drawdown of part of your commitment, and each one buys you more units. An independent valuer prices the portfolio at fixed intervals, and that value becomes the NAV of your units. When investments are sold, the fund distributes cash (or, sometimes, the securities themselves, known as an in-specie distribution) through a pre-agreed waterfall. At the end of the tenure the scheme winds up.

That is how AIFs work in practice. The rest of this guide takes each step in turn and dates each rule to the SEBI AIF regulations as they stand today. It does not cover category selection, AIF taxation, long-short strategies or pre-IPO investing, each of which deserves its own guide. It is about the plumbing.

One number frames everything that follows. As of 30 June 2026, SEBI's data on AIF activity showed ₹17.53 lakh crore committed to AIFs but only ₹7.59 lakh crore actually raised (net). Roughly 43% of committed capital had been called. Commitment and cash are different things in an AIF, and the gap between them is your responsibility to manage.

India regulated venture capital pools under the SEBI (Venture Capital Funds) Regulations, 1996 for sixteen years. Private equity, real estate, credit and hedge-fund-style pools either squeezed into that framework or sat outside regulation altogether.

On 21 May 2012, SEBI notified the new framework, the SEBI (Alternative Investment Funds) Regulations, 2012, replacing the venture capital regime. The new rules created three categories and defined an AIF as a privately pooled vehicle set up in India as a trust, company, LLP or body corporate. They also set mechanics still in force today: the ₹1 crore minimum, a ₹20 crore minimum corpus per scheme, a cap of 1,000 investors per scheme, and private placement only.

The rulebook has been rewritten many times since. A few milestones explain how AIFs work today:

• 2020: SEBI standardised the PPM into a two-part template.
• August 2021: The accredited investor framework arrived, lifting the ₹1 crore floor for accredited investors.
• November 2022: Tenure began to be counted from a scheme's first close.
• June 2023: Units had to be issued in dematerialised form.
• April 2024: A formal dissolution period was created for unsold investments.
• November 2024: Pro-rata and pari-passu rights of investors were written into the regulations.
• November 2025: "Accredited Investors only" funds were defined.
• February 2026: AIFs had to upload each unit class's NAV to the depositories.
• June 2026: SEBI issued a fresh Master Circular for AIFs on 3 June 2026, consolidating every circular to 31 May 2026. It was last updated on 7 September 2026.

Each change has pushed AIFs towards mutual-fund-style plumbing (demat units, depository NAV, standard documents) while keeping them private and illiquid.

An AIF has several parties, and knowing who holds which pen tells you who is accountable when something goes wrong.

The regulations allow four wrappers, but most Indian AIFs are set up as trusts. A trustee (often a professional trustee company) holds the fund's assets on behalf of investors and oversees the manager. Whatever the wrapper, you never own the underlying shares directly. You own AIF units, which the regulations define as your beneficial interest in the fund or scheme.

The roles break down like this:

• Sponsor: the person or entity that sets up the AIF. It must keep a continuing interest in the fund.
• Manager: appointed to manage the investments, and can be the same entity as the sponsor. It issues capital calls, picks investments and reports to you.
• Trustee: in a trust, it receives the manager's annual compliance test report and must flag violations to SEBI.
• Independent valuer: values the portfolio. It cannot be an associate of the manager, sponsor or trustee.
• Custodian, RTA and merchant banker: hold assets, maintain unit records and file the PPM with SEBI respectively.

Under the AIF Regulations as amended to 14 July 2026, the sponsor or manager must hold a continuing interest of at least 2.5% of the corpus or ₹5 crore, whichever is lower, invested in the fund itself. For Category III funds the figure is 5% or ₹10 crore. This stake cannot be created by waiving management fees. A manager whose own money moves with yours has a reason to care about the NAV, not just the fee base.

AIFs cannot advertise to the public. Under the SEBI AIF regulations, they raise money only through private placement, and the key document is the PPM.

The PPM must disclose everything material: the manager's background, fees and expenses, tenure, conditions on redemption, investment strategy, conflicts of interest and how the scheme will be wound up. SEBI requires a standard template with a Part A of minimum disclosures and a Part B for anything else. The PPM must also contain a tabular example of how fees and charges apply to you, including the distribution waterfall.

Three investor-protection rules matter here:

1. The manager must give you the PPM before you commit and take an acknowledgement that you received it.
2. No one involved (AIF, manager, trustee or sponsor) may offer assured returns.
3. Your contribution agreement must align with the PPM and cannot go beyond its terms.

The PPM is filed with SEBI through a merchant banker, and from 14 July 2026 a scheme can launch 10 working days after filing, down from 30 days. Filing is not a SEBI endorsement of the fund.

The AIF minimum investment is ₹1 crore per investor, with three exceptions:

• Employees and directors of the AIF or its manager can invest a minimum of ₹25 lakh.
• Joint investors: an investor with a spouse, parent or child can together meet the ₹1 crore floor, with no more than two such persons.
• Accredited investors: since August 2021, the ₹1 crore minimum does not apply to an accredited investor. Whether a fund accepts a smaller ticket is still the manager's commercial choice.

To become an accredited investor, an individual, HUF, family trust or sole proprietor needs one of the following:

• annual income of ₹2 crore or more;
• net worth of ₹7.5 crore or more, at least ₹3.75 crore of it in financial assets; or
• annual income of ₹1 crore plus net worth of ₹5 crore, at least ₹2.5 crore of it in financial assets.

Your primary residence does not count towards net worth. Certificates come from accreditation agencies, which are subsidiaries of stock exchanges or depositories.

This is the part of how AIFs work that surprises most new investors. In a typical Category I or II fund, you do not write a ₹1 crore cheque on day one. You sign a commitment, known globally as a capital commitment: a binding promise to provide up to ₹1 crore when asked. The regulations even define the fund's corpus as the total committed by investors, not the cash received.

The manager then issues a capital call (also called a drawdown notice) each time it needs money for a new investment, a follow-on round, or fees and expenses the PPM allows. Notice periods are set in the fund documents, and market practice is often around 10 to 15 business days. Each drawdown is calculated pro-rata to commitment. If your ₹1 crore is 2% of a ₹50 crore corpus, you pay 2% of every call. Since November 2024, when SEBI notified pro-rata norms for AIFs, the regulations have required this: investors' rights in each investment, and in its proceeds, must be pro-rata to their commitment.

SEBI consulted in November 2025 on whether pro-rata should be computed on total or undrawn commitment. That proposal is not in the Master Circular as updated on 7 September 2026, so check which method your PPM uses.

The first-close rules also matter. A scheme must declare its first close within 12 months, and the tenure clock starts there. Until first close, you may withdraw or reduce your commitment. After it, you are bound.

Category III funds, which trade mostly listed securities, often take money upfront or in one or two tranches. SEBI's data reflects this. At 30 June 2026, Category III funds had raised about 64% of their commitments in cash, against about 37% for Category II.

Take a hypothetical Category II private equity fund with a five-year investment period. You commit ₹1 crore. The calls might look like this:

These numbers are illustrative only. The point is the shape: your cash goes in over several years, and some funds never call the full commitment. The undrawn ₹85 lakh after the first call is still a liability you must meet at short notice, so do not park it in illiquid assets.

A missed drawdown is not like a missed SIP. Your commitment is a contract, and the PPM lays out what happens if you break it. SEBI does not prescribe a single penalty, but it does set the boundaries.

You lose pro-rata rights in that investment. The pro-rata rule explicitly does not protect an investor who has defaulted on their contribution to a given investment. The other investors fund the deal, and the upside is theirs.

You may be shut out of later deals. SEBI's due-diligence checklist for merchant bankers asks whether the PPM provides that a defaulter cannot take part in subsequent investments until the default is cured. A defaulting investor also cannot co-invest alongside the fund in that company.

You may pay the fund's borrowing cost. Since August 2024, under SEBI's borrowing guidelines for Category I and II AIFs, a fund can borrow to plug a shortfall when an investor fails to pay on time and the deal cannot wait. The loan is capped at the lowest of three amounts: 20% of the proposed investment, 10% of the fund's investable funds, or the undrawn commitments of the other investors. The cost is charged only to the investor who defaulted. Category III funds have no such borrowing route for drawdowns.

Contractual remedies come on top. Contribution agreements commonly add default interest, suspension of rights, compulsory transfer of your units, or a reduction of your stake. The exact menu and any cure period are in your PPM, so read that section before you sign.

Every rupee you pay in is converted into AIF units, and those units are your legal claim on the pool.

Funds can issue different classes of units. Classes commonly differ by fee (for example, a direct-plan class with no distribution fee, which every scheme must now offer) or by the manager's carried interest. What SEBI restricts is subordination of investors. Since November 2024, only the manager or sponsor, development finance institutions, state industrial development corporations and government-owned entities may take junior units that absorb losses first.

Differential rights for select investors are allowed only if they do not hurt others and are disclosed in the PPM. Funds made up entirely of accredited investors, and Large Value Funds, can waive this pari-passu requirement with each investor's consent.

Under a regulation added on 15 June 2023 and SEBI's circular on issuing AIF units in demat form, AIFs must issue units in demat form. The cut-off dates depended on fund size:

Units belonging to investors who had not shared demat details were parked in an Aggregate Escrow Demat Account under SEBI's December 2023 process for crediting units. Once you provide your details, the AIF must move them to your account within five working days.

Demat does not make AIF units freely tradable. Transfers remain governed by the PPM, and depositories must block any transfer that needs the manager's approval until it is given. Stamp duty applies to the issue, transfer and sale of AIF units.

AIF NAV is the value of the fund's portfolio, including cash, minus liabilities, divided across the units in issue. The arithmetic is the same as a mutual fund. The inputs are not. Much of what an AIF owns has no daily market price.

SEBI sets the valuation hierarchy. Securities covered by mutual fund valuation norms are valued under those norms. Unlisted and thinly traded securities are valued under the International Private Equity and Venture Capital Valuation (IPEV) Guidelines, endorsed by the industry association. The PPM must disclose the method used for each asset class.

One guardrail helps you read the number. If the value of any single holding moves more than 20% between two consecutive valuations, or more than 33% in a financial year, the manager must explain why.

In other words, a Category II fund's NAV can be six months old when you read it, and it is built on valuation models, not trades. Early in a fund's life, NAV often sits below the money you have paid in, because fees and setup costs are charged before investments mature. This dip is often called the J-curve seen in private equity funds. Judge a private fund on its realised distributions over the full term, not on any single NAV print.

Since SEBI's circular on reporting unit values to depositories of 6 February 2026, AIFs must upload the latest AIF NAV for each unit ISIN to the depository system within 30 days of the valuation date. That is why AIF holdings now show a value in your consolidated statement. The depositories must attach a disclaimer that the NAV shown is indicative. Treat it as a reference point, not a price someone will pay you.

The mechanics can look like hoops, but most of them exist to protect you:

• Cash works only when needed. Capital is called deal by deal, so your undrawn commitment stays in your own hands until the call.
• Fair shares by design. Pro-rata rights mean every investor participates in every investment in proportion to commitment.
• Independent valuation is compulsory. Category I and II funds need an independent valuer every six months, and Category III NAV must be computed independently of the fund management team.
• One record of ownership. Demat units and depository NAV put your AIF in the same statement as your shares and mutual funds.
• Consent thresholds limit surprises. Changing the strategy materially, or extending the tenure, needs two-thirds of investors by value. Entering a dissolution period needs 75%.
• The manager has money in the pool. The continuing interest rule keeps the sponsor or manager invested alongside you.

The rules above are public. The hard part is applying them to one specific fund when you are holding a long PPM and a closing date. That is the gap PMS Sahi Hai is built to close.

PMS Sahi Hai describes itself as India's first AI-powered PMS and AIF marketplace. It is APMI-registered and tracks more than 900 PMS, AIF and GIFT City offerings on one shelf. Here is how it fits the mechanics covered in this guide:

• Shortlist before you read a single PPM. The AIF comparison shelf puts funds side by side, and each fund page shows the same fields: minimum investment, AUM, returns, risk measures and a facts-and-fees panel. Where a fund has not disclosed its fees or lock-in terms, the page shows a blank, not a guess. That blank is your first question for the manager.
• Ask Nyra the structural questions. Nyra is the platform's AI research analyst. It lets you explore Category I, II or III funds by capital and investment timeline. It is grounded only in SEBI, AMC and IFSCA primary sources, cites a source for every answer, and declines to answer when no verifiable source exists.
• One score, one published method. Nyra rates strategies on a 0–10 scale across five pillars, and the scoring methodology is public. The score is backward-looking and built from disclosed performance data. It does not grade a fund's drawdown schedule or default clauses, so use it as a filter, not as a substitute for the PPM.
• Learn the vocabulary first. The What is an AIF? primer and the glossary cover the basics. The guide to internal rate of return explains how to measure a fund where cash goes in and comes out in tranches.

One honest caveat: Nyra is a research tool and does not give personalised investment advice. For that conversation, the team offers a private 15-minute consultation.

A lock-in in an AIF is not a separate clause bolted onto the fund the way it is in a tax-saving product. For Category I and II funds it is the structure itself. These funds must be close-ended, and their schemes must run for a minimum tenure of three years. Most private equity and credit funds choose longer terms, and there is no right to redeem during the term.

The key mechanics:

• The clock starts at first close. Tenure is counted from the date of first close, not from your individual drawdown.
• Extensions need your vote. A close-ended AIF can extend its tenure by up to two years, and only with the approval of two-thirds of unit holders by value of their investment. An Accredited Investors only fund can extend by up to five years, on the same two-thirds approval.
• No consent, no extension. Without that approval, or once the extended tenure expires, the scheme must wind up.
• Category III is different. Category III schemes may be open-ended or close-ended. Open-ended schemes allow periodic redemption on terms set in the PPM.

What about leaving early? Your options are narrow:

1. Transfer your units, if the PPM allows it and the manager approves. A buyer must exist, and the price is negotiated.
2. Listing: close-ended AIF units can be listed on a stock exchange, but only after final close and with a minimum tradable lot of ₹1 crore.
3. Material-change exit: if the sponsor or manager changes, control changes, or fees rise, dissenting investors must be offered an exit. In a close-ended fund, the exit price cannot be lower than the average of two independent valuations.

Money comes back to you as investments are realised, distributed per the PPM's distribution waterfall. SEBI requires every PPM to illustrate this waterfall, but it does not prescribe a single formula.

A typical private-fund distribution waterfall runs in four tiers:

1. Return of capital: investors get back the capital they contributed.
2. Preferred return (hurdle): investors receive a stated return on that capital.
3. Catch-up: the manager receives a larger share until it has its agreed portion of profits.
4. Carried interest: remaining profits are split between investors and manager in the agreed ratio.

The pro-rata rule applies to distributions too, with one carve-out: the share of profits that investors agree to give the manager as carried interest. Fee levels, hurdle rates and their tax treatment are outside this guide.

Distributions can also come in specie, as the securities themselves rather than cash. The PPM must disclose when this can happen.

When the tenure ends, the scheme enters a liquidation period of one year to sell what remains. If some investments still cannot be sold, SEBI's April 2024 framework for unliquidated investments offers two routes, each needing approval from 75% of investors by value:

• Dissolution period. The manager must first arrange a bid for at least 25% of the value of the unsold investments, so that dissenting investors can exit. The dissolution period cannot exceed the scheme's original tenure and cannot be extended. The manager cannot charge a management fee during it, and no new commitments or investments are allowed.
• In-specie distribution. The unsold securities are handed to investors. A 25% bid is arranged so that dissenters can exit for cash.

If neither route wins approval, the unsold investments must be distributed in specie. For a first-time investor, this is the real meaning of "illiquid". You may end up holding a sliver of an unlisted company after the fund itself has closed.

The same mechanics that protect investors also impose real costs:

• Liquidity is close to nil for years. A three-year minimum is the floor, not the norm. With extensions, liquidation and a possible dissolution period, a close-ended fund can hold your money far longer than its headline term.
• You carry a contingent liability. Missing a capital call can cost you your share of a deal, your place in later deals and the fund's borrowing costs.
• NAV is a model, not a market. Half-yearly valuations of unlisted holdings are estimates, and the depository NAV is labelled indicative for a reason.
• Exits depend on someone else. Transfers need manager approval and a buyer, and in-specie distribution can leave you holding unlisted securities.
• Minority voice. Consent thresholds are by value, so a few large investors can carry an extension or a dissolution vote you oppose.

Once you see how AIFs work end to end, the due-diligence questions write themselves. Before signing a contribution agreement, you should be able to answer each of these from the PPM:

• Commitment and calls: What is the expected drawdown pace and notice period? Where will I hold my undrawn amount so it is ready?
• Default terms: What exactly happens if I miss a call, and is there a cure period?
• Units: Which class am I in? Are there side letters or differential rights for others?
• NAV: Who is the independent valuer, and what method applies to each asset class?
• Tenure: When is first close, what is the term, and how likely is an extension?
• Exit and waterfall: How do distributions flow, and what are the transfer conditions?

Answer these and your ₹1 crore stops being a leap of faith and becomes a schedule you can plan around. If you want help narrowing the field first, PMS Sahi Hai and its AI analyst Nyra can shortlist funds by category and timeline before you open the first PPM.

The mechanics in this guide are the same in every SEBI-registered AIF. The details are not. Drawdown pace, valuation method, waterfall, default clauses and transfer terms differ from fund to fund, and they decide how the investment feels to live with.

Start by asking Nyra to compare the AIFs on your shortlist, with a source cited for every answer. Then book a private 15-minute consultation with the PMS Sahi Hai team and walk through the commitment, capital call and exit terms before you sign.