FIXED INCOME
Debt AIF
A fund that lends for investors who can commit size and time.
What it is
A Debt AIF is a SEBI-registered Alternative Investment Fund that lends money. Most sit in Category II and are described as private credit, structured credit or performing credit funds. Investors pool capital; a professional manager underwrites loans and debentures issued to companies, typically secured against cash flows, receivables or assets.
The return comes from interest and fees earned on that lending book, net of fund expenses, and is distributed to investors over the life of the fund.
The distinction from a deposit is the whole point. There is no contracted rate and no promise of a fixed amount on a fixed date. What you are buying is a manager’s underwriting standards, security structuring and recovery discipline.
How it works
01
The fund is registered with SEBI, close-ended, and runs for a defined tenure commonly three to five years, sometimes extendable.
02
The SEBI minimum commitment is ₹1 crore per investor, per scheme.
03
Capital is often called in tranches as deals are closed, rather than taken upfront.
04
The manager builds a diversified book of secured loans and debentures across borrowers and sectors.
05
Income is distributed periodically; principal comes back as loans amortise or are repaid.
06
Investors receive fund reporting through the year and Form 64C annually for tax purposes.
Who it suits
1
HNI, family office and corporate treasury investors who can write a ₹1 crore commitment without straining liquidity.
2
Investors who already hold a base of deposits and bonds and want to add a distinct credit allocation.
3
Those who accept genuine illiquidity for the fund’s full tenure.
4
Investors comfortable evaluating a manager track record, credit process, recovery history rather than a rate.
Less suitable for: first-time fixed income investors, capital that may be needed before the fund winds up, and anyone who reads a target return as a promised return.
Taxation
Category I and Category II AIFs carry pass-through status. Income other than business income is not taxed at the fund level; it is taxed in the investor’s hands and retains its original character.
• Interest income passes through as interest and is taxed at your slab rate.
• Capital gains pass through as capital gains and are taxed under the applicable capital gains rules.
• Any business income, if the fund earns it, is taxed at the fund level instead.
The fund deducts TDS at 10% on income credited or paid to resident investors. For a top-bracket investor receiving interest income, 10% is well short of the final liability — the gap has to be planned for through advance tax. Non-resident investors are withheld at rates in force, subject to treaty relief where documentation is in order.
Frequently asked
Is my capital protected?
No. A Debt AIF offers no guarantee of return on capital or return of capital. Security cover, diversification and underwriting reduce risk; they do not remove it.
Can I exit before the fund ends?
Generally not. These are close-ended vehicles. Some funds permit a transfer of units to another eligible investor with the manager’s consent, but you should invest assuming you cannot exit.
Why is the minimum ₹1 crore?
It is the SEBI-prescribed minimum commitment for an AIF investor, set to restrict these vehicles to investors able to absorb the risk and the illiquidity.
How is this different from a debt mutual fund?
A debt fund mostly buys traded securities and offers daily liquidity. A Debt AIF originates or participates in private loans, holds them to maturity, and locks you in for the fund’s tenure a different risk and a different return profile.
What should I look at before committing?
The manager’s credit process and track record across a full cycle, the security structure on underlying deals, sector and borrower concentration, the fee structure, and the drawdown schedule.