Why Liquidity Could Be the Next Big Breakthrough for India’s AIF Market

India’s alternative investment fund market has grown with astonishing speed. In just over a decade since the Securities and Exchange Board of India introduced the framework in 2012, it has evolved from regulatory experiment to one of the fastest-expanding segments of the financial system, compounding at nearly 30% annually over the past five years.

For high net-worth individuals and family offices, AIFs have offered diversification and a rare shield from the volatility of public markets.

But there is a catch: liquidity.

Unlike mutual funds or listed equities, AIFs are structured as closed-ended vehicles with lock-ins stretching seven to ten years. While that mirrors global private fund practices, it restricts participation to ultra-HNIs and institutions willing to forgo access to their capital for nearly a decade. If AIFs are to break out of this narrow orbit and enter the financial mainstream, India must create mechanisms for liquidity.

Global Lessons
Mature markets abroad have already demonstrated how liquidity can transform private capital. Two models dominate: investor-driven secondary transactions, where limited partners sell fund commitments to new entrants; and manager-led secondaries, where fund houses orchestrate structured exits for investors while retaining prized assets. Both approaches have normalised early exits and wider entry points, fostering confidence and scale.

There is little reason why India cannot adapt these mechanisms to its own ecosystem.

Here’s why liquidity matters now:

Liquidity is not a luxury; it is the precondition for the next phase of growth. Consider the gains:

Expanding Access: The lack of exit options deters many mass-affluent investors. Structured exit windows or secondary platforms would make AIFs less forbidding and widen the investor base.

Price Discovery and Trust: At present, AIF valuations are opaque and largely based on internal NAV calculations. Secondary transactions would create reference prices, improving transparency and enhancing investor confidence—crucial for an industry that still struggles with perception gaps.

Portfolio Flexibility: Investors’ lives change, capital needs emerge, portfolios require rebalancing. Flexibility to exit partially or transfer holdings would make AIFs more user-friendly, without diluting their sophistication.

Accelerating Capital Flows: Liquidity could attract the next wave of domestic capital into AIFs—critical if India wants its private markets to scale globally.

Building an Ecosystem: Liquidity doesn’t just serve investors; it creates business opportunities. Just as platforms like STAR MF revolutionised mutual funds, dedicated AIF secondary platforms could emerge, complete with market-makers. This could deepen the entire alternatives ecosystem.

Unlocking Institutional Participation: Investors are typically wary of illiquid products. A credible secondary market would ease those concerns and unleash a wave of institutional capital into alternatives.

Fund managers need not view liquidity as a threat to their model of patient capital. On the contrary, it can be a catalyst that takes the industry from a niche to a systematically significant scale. India’s investors are becoming more sophisticated, but they also demand optionality. If AIFs can provide both high-return potential and credible exit pathways, they will capture far more than the narrow slice of ultra-wealthy money they do today.

The past decade has proved that alternatives can thrive in India. The next will depend on whether the market can offer not just products, but pathways in and out. Liquidity is the missing link, and without it, India’s AIF revolution risks stalling just short of maturity.

*Views are personal