Wealthy investors are increasingly turning to private credit to diversify portfolios, with SEBI-registered Category II AIF commitments reaching ₹12.74 lakh crore by March 2026. While the asset class offers higher yields compared to traditional bonds, investors must weigh the potential returns against liquidity constraints and credit risks.
What Happened
Wealthy Indian investors and family offices are shifting their strategy, making private credit a permanent part of their investment portfolios. Recent data indicates that commitments to SEBI-regulated Category II Alternative Investment Funds (AIFs)—which are the primary vehicles for private lending—reached ₹12.74 lakh crore as of March 2026. This is a significant figure, accounting for nearly three-quarters of the total ₹16.94 lakh crore committed to the entire AIF industry. This trend shows that private debt is no longer just an experimental investment but a core component for affluent portfolios.
Why Investors Are Choosing Private Credit
Investors are seeking assets that can provide stable income and diversification, especially when equity markets experience periods of volatility. Many family offices now assign 5% to 15% of their total portfolio to private credit. This demand has grown because traditional banks often face regulatory constraints, limiting their ability to lend to certain types of high-risk projects, acquisitions, or promoter-led activities. Private credit funds act as a bridge, stepping in to provide financing where traditional banks cannot. This provides investors with an opportunity to earn returns that are often higher than what they might find in public bond markets.
Yields And The Strategy Mix
Private credit funds offer varying levels of return based on the risk profile of the loan. Gross yields in the industry currently range from 14% to 22%. Performing credit, which involves lending to stable, cash-generating companies, typically offers yields between 14% and 18%. For investors with a higher tolerance for risk, funds dealing in complex or special situations can offer yields as high as 18% to 22%. These returns are designed to compensate the investor for taking on risks that are not present in standard bank fixed deposits or government securities.
The Risks Investors Must Weigh
While the yields appear attractive, private credit is not a risk-free investment. A primary concern is liquidity; unlike stocks or bonds traded on an exchange, these investments are illiquid. Investors often cannot exit their positions quickly if they suddenly need cash. There is also the inherent risk of credit default, where the borrowing company fails to repay the loan principal or interest. Additionally, private credit assets are not marked-to-market daily like stocks, which means that the true value of the investment may not be fully visible until a repayment is missed. Investors should also be aware that the regulator, SEBI, has tightened rules around AIFs to ensure better valuation of assets and to prevent excessive concentration of risk, which is a key factor in protecting the overall financial system.
What Investors Should Track Next
For those invested in or considering this space, the most important factor is the manager's ability to underwrite loans. Investors should carefully evaluate the quality of the collateral backing the loan and the seniority of the debt, which determines who gets paid first if the borrower defaults. Monitoring the fund manager's historical track record and their ability to successfully exit past investments will remain the most critical monitorable for success in this asset class.