Why AIFs need regulatory innovation for next phase of growth

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Subscribe to enjoy similar stories. Alternative investment funds (AIFs) have evolved from niche offerings to become a cornerstone of India's financial ecosystem. With a remarkable compound annual growth rate (CAGR) of 31% over the past five years and commitments reaching ₹12.4 trillion as of September 2024, AIFs are poised to play an increasingly critical role in reshaping India's investment landscape.

For sophisticated investors, AIFs have become an increasingly important part of their portfolio. As of January 2025, 1,485 AIFs were registered with the Securities and Exchange Board of India (Sebi). However, as the sector grows, the regulatory environment governing AIFs must evolve to not just keep pace with this rapid expansion but also adapt to global trends.

AIFs have thrived under Sebi's relatively “light-touch" approach. This regulatory style has allowed new products and ideas to blossom, encouraging fund managers to innovate and explore diverse investment opportunities. However, as the sector matures, the regulator faces a familiar dilemma: How to strike the right balance between nurturing growth and imposing necessary guardrails.

The perspective of regulation has to continue to prioritize flexibility to foster innovation. Regulating the fund rather than the investment manager could inadvertently turn into a rigid framework, stifling the very entrepreneurial spirit that has propelled the industry forward. A more adaptive approach, allowing fund managers to explore emerging sectors like climate tech, biotechnology, and blockchain, would keep India's AIF industry on the cutting edge of global trends.