Gold has traditionally held an important place in Indian investment portfolios. It has been used as a store of value and as a means of financial security during periods of uncertainty. 

Its attractiveness arises from liquidity, universal acceptance, and the absence of dependence on managerial performance or investment strategy.

In recent years, as investors began exploring alternatives beyond mutual funds and listed equities, alternate investment fund structures gained greater attention. 

This development led to comparisons between AIFs and gold, with some investors viewing AIFs as a modern alternative within diversified portfolios.

However, the similarity between the two is mainly behavioural and not economic.

The Structural Shift Behind AIF Growth

The growth of AIFs in India reflects broader changes in financial markets and patterns of wealth creation.

Value creation moving outside public markets.

Many companies now remain privately funded for longer periods before listing on stock exchanges. As a result, a substantial portion of business growth takes place outside public markets. 

This has increased investor interest in identifying the top AIF in India across private equity and credit strategies.

Increasing market efficiency

Public markets have become more efficient due to improved information availability and higher institutional participation. 

This has reduced the scope for easily identifiable excess returns and encouraged investors to consider alternative investment avenues.

Evolution of portfolio construction

Portfolio construction has gradually shifted from simple equity and debt allocation to a framework that recognises different sources of return. 

Investors are increasingly differentiating among growth assets, income-generating assets, inflation hedges, and alternative strategies.

Within this structure, AIFs form part of the alternatives allocation alongside assets such as gold rather than replacing them. Investors evaluating the best AIF in India often do so after establishing exposure to traditional asset classes.

Category II AIFs

Category II AIFs represent a significant segment of the AIF industry in India because they correspond with the changing nature of value creation in the economy.

These funds generally invest in private equity, private credit, real estate, or special situations where returns arise from improvements in business performance, restructuring, or asset appreciation over time, instead of short-term price movements.

How returns are generated

  • Growth in underlying businesses
  • Strategic exits or public listings
  • Interest spreads in private lending
  • Monetisation of assets over time

A central concept associated with Category II AIFs is the illiquidity premium. 

These investments involve longer holding periods and limited liquidity, which investors accept in anticipation of higher returns.

The nuance behind smoother returns

Private assets are not valued on a daily basis. Consequently, reported returns often appear smoother than those of listed equities. 

This does not eliminate economic risk. 

Valuations may be revised at later stages in response to changes in market conditions or business circumstances.

Why investors allocate

Category II AIFs provide access to stages of business growth that may not be available through listed markets. 

In practice, such allocations often replace a portion of listed equity exposure rather than assets used for stability or hedging. 

Investors comparing the best AIF in India typically look for consistency in strategy, experience of the investment team, and clarity around exit history. For this purpose, information and comparison platforms such as PMS AIF WORLD are commonly referred to.

Category III AIFs

Category III AIFs follow a different investment approach. Their objective is to generate returns through trading strategies and market positioning.

These funds generally employ strategies such as long-short equity, arbitrage, market-neutral approaches, and quantitative trading models.

How returns are generated

  • Identification of pricing inefficiencies
  • Relative performance between securities
  • Differences in volatility and liquidity
  • Active risk management and allocation decisions

While Category II funds create value over longer investment periods, the performance of Category III funds depends largely on ongoing execution and the success of the strategy.

The real source of risk

In Category III AIFs, risk arises primarily from strategy execution and managerial capability. 

Investors evaluating the top AIF in India, therefore, pay close attention to risk management practices and transparency. Information sources, including PMS AIF WORLD, are often referred to for comparison and understanding.

Liquidity is both a strength and a limitation.

Category III AIFs generally provide higher liquidity compared to Category II funds. 

While this increases flexibility, it may also encourage short-term investment decisions based on recent performance, which can influence long-term results.

Are AIFs the New Gold?

The comparison between AIFs and gold reflects a similarity in investor intent but does not imply functional equivalence.

Gold primarily functions as a hedge against uncertainty and inflation. AIFs are designed to generate returns through specialised investment strategies, participation in private markets, or active portfolio management. 

While gold contributes to stability within a portfolio, AIFs generally aim to increase return potential by accepting higher levels of complexity and risk.

Thus, AIFs broaden the investment opportunity set but continue to serve a different role from assets primarily intended for preservation and stability.

Investors often evaluate both AIF and PMS structures when identifying the top PMS in India or when considering suitable diversification strategies.

Wrapping Up

AIFs should not be regarded as inherently superior to traditional investments. Investment outcomes depend on manager quality, entry valuation, fee structure, and market conditions.

Differences across AIF categories also influence outcomes. 

Category II AIFs involve illiquidity and long-term execution risk linked to underlying assets, while Category III AIFs involve strategy risk and dependence on managerial skill. 

These distinctions are increasingly highlighted in frameworks developed by platforms such as PMS AIF WORLD, which focus on differences in strategy, risk, and investment approach.