Top 5 Category II AIFs in India Delivering Superior Risk-Adjusted Returns

In recent years, the Indian investment landscape has seen a significant shift , shift among sophisticated investors, family offices, high net worth individuals and institutional distributors increasingly moving away from traditional portfolio anchors such as simple stocks, bonds, or mutual funds towards alternative investment solutions that provide diversification and risk-adjusted returns. 

This shift is no accident: it reflects a maturing investment ecosystem where lower correlation with public markets, access to private opportunities and mitigating structured risks have become key elements of long-term wealth strategies.

At the heart of the development is Alternative Investment Funds (AIFs), privately held investment vehicles regulated by the Securities and Exchange Board of India (SEBI) that enable The deployment of sophisticated capital , capital from private equity and credit to real , real estate and private equity positions. 

While mutual funds captured household savings and PMS focused on concentrated equity stakes, secondary alternative investment funds (AIFs) became the vehicle of choice for investors seeking calculated risk, downside protection and non-linear alpha, especially in an economy where listed market valuations often outpace fundamentals.

Category II AIFs sit at the heart of India’s alternative investment ecosystem. They don’t chase momentum. They don’t rely on leverage-heavy trading strategies. Instead, they focus on private equity, structured credit, real assets, and special situations, where returns are driven by cash flows, asset quality, and disciplined underwriting.

As assets under management in India’s AIF industry cross ₹13 trillion, Category II funds account for the largest share both in terms of capital raised and institutional participation. Their appeal lies in risk-adjusted returns, not headline IRRs.

Under SEBI regulations, Category II AIFs are funds that:

Do not undertake leverage other than for day-to-day operational needs

Invest in long-term illiquid assets

Pursue specific strategies such as private equity private credit real estate infrastructure or special situations

Unlike Category I AIFs (which focus on start-ups and socially desirable sectors) or Category III AIFs (which use leverage and trading strategies), Category II AIFs are structurally conservative. The return profile is smoother, and capital protection plays a central role.

This is precisely why Category II AIFs attract:

• Family offices

• Institutional investors

• HNIs looking beyond listed equities

• Investors seeking predictable compounding rather than volatility-driven gains

Why Category II AIFs Deliver Better Risk-Adjusted Returns

The strength of Category II AIFs lies in how returns are generated, not just how high they look on paper.

First, investments are made at valuation discounts compared to public markets. Whether it’s a growth-stage company, a stressed asset, or a secured lending opportunity, entry prices matter.

Second, cash flows, not market sentiment, drive outcomes. In private credit funds, returns come from structured interest payments. In private equity, exits are planned around earnings visibility, not index movements.

Third, governance and control are stronger. Category II funds often negotiate board seats, covenants, downside protection clauses, and asset-backed security tools unavailable in listed markets.

Lastly, volatility is lower. Because assets aren’t marked to market daily, investors are insulated from short-term noise, allowing capital to compound over a full economic cycle.

Industry experts also estimate that Category II funds contribute roughly 55–60% of total AIF assets under management, further highlighting their dominant position. 

Category II AIFs are not meant to replace equities or mutual funds. They are designed to complement them.

In a rising-rate or uncertain macro environment, these funds act as stabilisers. In bull markets, they may underperform frothy equity returns but over a full cycle, they often outperform on a risk-adjusted basis.

For sophisticated investors, Category II AIFs serve three core purposes:

• Diversification away from listed market volatility

• Access to private market opportunities unavailable elsewhere

• Predictable, thesis-driven capital deployment

This is why many portfolios today allocate 10–30% of long-term capital to Category II alternatives.

Let’s discuss about Top 5 Category II AIFs in India

1. TVS Shriram Growth Fund 4 Category II AIF: A Category 2 fund recently recognized with , with a high CRISIL rating reflecting its strong management and investment processes. 

2. Aditya Birla Sun Life Realty Credit Fund (Category II AIF): A large scale of category II  AIF that focuses on real , real estate loans and targets collateralized lending in key Indian markets.

3. 360 ONE Private Equity Fund Category II AIF: SEBI-registered private equity fund with diversified private market exposure. 

4. Singularity Equity Fund I – Category II AIF: An established private equity and growth capital AIF in India. 

5. Neo Income Plus Fund (Category II AIF): Part of a suite of private credit and structured debt funds designed for medium-to-long-term risk-adjusted returns. 

While Category II AIFs are relatively conservative, they are not risk-free.

Liquidity is the biggest constraint. These funds typically have tenures of 7–10 years, with limited exit flexibility. Capital is locked in for the long haul.

Second, manager selection is critical. Returns vary significantly between funds depending on underwriting discipline, governance standards, and exit execution.

Third, transparency differs from listed instruments. Investors must rely on periodic reporting rather than real-time pricing.

This makes due diligence and not entirely return chasing, the most important decision factor.

In a world where traditional asset classes are increasingly correlated and exposed to macroeconomic fluctuations, the second category of venture funds occupies a unique position.  The combination of their strategy and long-term orientation makes them an indispensable tool for sophisticated investors who want to balance the ambition of return with the discipline of risk.

As India’s economy deepens and private enterprises grow larger before listing, Category II AIFs will continue to gain relevance. They bridge the gap between traditional investing and private markets, offering exposure to real assets, real cash flows, and real decision-making power.

In a world obsessed with short-term returns, Category II AIFs reward patience and that is precisely why they have delivered superior risk-adjusted outcomes over time.