Category III alternative investment funds saw commitments jump 37% to ₹3.1 trillion in FY26, outperforming the broader AIF industry's 26% growth. This trend reflects a shift toward long-only strategies despite tax disadvantages compared to newer specialized investment funds. Investors are increasingly moving from traditional portfolio management services toward these pooled investment vehicles for simplified administration.
Category III (Cat-III) alternative investment funds, which are complex pooled investment vehicles often favored by high-net-worth individuals, have significantly outpaced the broader alternative investment industry in terms of growth during the 2025-26 financial year. Data shows that total commitments to Cat-III AIFs reached ₹3.1 trillion, a 36.9% increase over the previous year. This growth rate comfortably exceeded the 25.6% expansion seen across the entire AIF industry, which ended the year with total commitments of ₹16.9 trillion.
Strategic Shifts and Tax Challenges
The expansion of Cat-III AIFs comes despite a noticeable decline in the appeal of long-short funds, which were traditionally a staple of this category. Since the introduction of specialized investment funds (SIFs) in September 2025, many investors have opted for the newer SIF structures. These SIFs offer more attractive tax benefits and lower entry barriers, with minimum investments typically starting at ₹10 lakh compared to the ₹1 crore threshold usually required for standard AIFs. Unlike mutual funds or SIFs that benefit from pass-through taxation at the investor level, Cat-III AIFs are generally taxed at the fund level, which remains a primary disadvantage for investors.
Industry trends indicate that the growth of Cat-III is now primarily driven by long-only funds and pre-IPO strategies. Many fund managers are increasingly structuring pre-IPO portfolios under the Cat-III banner rather than the traditional Category II. This provides managers with the flexibility to hold up to 49% of the fund in unlisted securities while keeping the remainder of the corpus in liquid, listed instruments. Multi-strategy funds that blend debt, equity, and derivatives are also seeing increased adoption within this segment.
Transition from PMS to AIF Structures
A notable factor behind the rise in Cat-III assets is the migration of many portfolio management service (PMS) providers toward AIF structures. While PMS schemes often provide a more favorable tax structure and fewer regulatory constraints, many providers are switching to AIFs to simplify the management of pooled capital. Managing a PMS account requires individual demat accounts for every investor, whereas an AIF functions as a single pooled vehicle, which is operationally easier for asset managers to scale. This shift occurred even as the broader PMS industry experienced a 9.6% growth in assets to ₹41.4 trillion in FY26, a slower pace compared to the 13.9% growth recorded in the prior year.
For investors, the key monitorable remains the evolution of these tax structures and how SIFs continue to compete with the AIF category. As the industry matures, the performance of long-only strategies versus traditional multi-strategy funds will be critical to tracking whether this momentum in Cat-III AIFs can be sustained against the more tax-efficient SIF alternative.