India’s wealth management landscape is being reshaped by a confluence of factors, including evolving demographics, rising incomes, shifting investment preferences, and asset appreciation. With net worth exceeding ₹5 crore, nearly one per cent of Indians now qualify as high net-worth individuals (HNI); meanwhile, the number of ultra-wealthy individuals (with ₹1,000-plus crore assets) grew to 1,539 — representing a 46 per cent increase in wealth from last year, according to Hurun India. The affluent base is growing not just in numbers but also financial sophistication, paving the way for innovative investment platforms like alternative investment funds (AIFs).

While metropolitan cities have long remained hubs of diversified financial planning, a new wave of demand is emerging from the smaller cities — driving the need for financial strategies that go beyond the urban strongholds. There is also a shift from physical assets such as property and gold to financial assets, especially equity and other higher-yield products.

Today, one size does not fit all, as tailored investments for specific risk-return goals are increasingly in demand. Technology has emerged as a key enabler, transforming how investors access, evaluate, and engage with sophisticated wealth solutions. By enhancing service delivery through automation, real-time analytics and AI, technology is helping create a more seamless, personalised, and insight-driven investment experience for the emerging affluent.

Rise of AIFs

The growing popularity of alternative investments stems from progressive regulatory developments and continuous technological advancements.

Over the past six years, commitments in the Indian AIF industry has soared by over 378 per cent — from ₹2.82 lakh crore in FY19 to ₹13.49 lakh crore in Q4FY25. This near five-fold expansion highlights the significant market potential. AIF’s expanding reach beyond ultra-HNIs to a broader spectrum of investors owes to several factors.

Firstly, enhanced transparency and regulatory support from SEBI through measures such as mandatory dematerialisation of AIF holdings and aligning risk-return profiles with financial commitments have strengthened governance and boosted investor confidence.

Secondly, the diversified investment choices under the three distinct categories of AIFs provide fund managers the flexibility to invest across a wide spectrum of asset classes. This includes debt instruments (such as venture debt and structured debt), listed and unlisted equity (including private equity funds), real estate, infrastructure assets (including REITs and InvITs), and even derivatives for strategic leverage and enhanced returns.

Thirdly, AIFs have greater operational flexibility, compared to mutual funds. Given that AIFs, with a minimum investment threshold of ₹1 crore, are primarily targeted at HNI investors, the regulatory environment is less restrictive, giving fund managers more flexibility in constructing and managing portfolios, potentially leading to more competitive risk-adjusted returns.

Lastly, alternatives offer two compelling advantages: diversification and outperformance potential. With traditional equity returns stabilising, investors are pivoting to sophisticated strategies that promise both higher yields and insulation from market swings.

AIFs have consistently outperformed mutual funds and gold over the long term. As of September 2024, Long-Only Cat III AIFs delivered 23.52 per cent annual returns over five years, compared to 18.98 per cent for Nifty50 TRI mutual funds and 14.88 per cent for gold.

The AIF industry in India shows strong growth potential, with a forecasted compound annual growth rate of 26 per cent, to reach ₹43.64 lakh crore by 2028. Together the portfolio management services (PMS) and AIF industries are projected to cross ₹100 lakh crore by 2030.

Looking ahead

SEBI’s introduction of specialised investment funds (SIFs) has the potential to bridge the gap between mutual funds and PMS. SIFs, with a minimum investment requirement of ₹10 lakh, are structured yet adaptable investment vehicles with higher risk-return potential. SIFs will attract HNIs, much like PMS and AIFs, but at a lower entry threshold. They are expected to further reshape the investment landscape by providing unique benefits and addressing existing gaps.

The growth of AIFs in GIFT City is set for the next phase of significant expansion. With over 200 funds registered in this deemed offshore location and a strong pipeline, GIFT City offers non-resident Indians a streamlined, tax-efficient route to invest in India. It also provides resident Indians a regulated avenue to explore offshore opportunities under the Liberalised Remittance Scheme.

The real disruption? When India’s street-smart investing psyche — honed on real estate and generational savings — collides with the algorithmic precision of global alternatives. The winners won’t be those who adapt. They’ll be the ones who code the rules mid-game.

(The writer is President and Head — Wealth, Cards and Payments, Axis Bank)