India's alternative investment landscape has matured dramatically. AIF commitments crossed ₹15 lakh crore in 2025. Listed REITs and InvITs have institutionalised commercial real estate and infrastructure income for market participants. SEBI's 2024 SM REIT framework has created a new regulated category for specific commercial property income.
For HNIs building portfolios beyond traditional mutual funds and direct equity, understanding where each alternative instrument fits and which is best suited for different objectives is now essential investment literacy. This guide covers all four major categories, with particular attention to SM REITs as the category most directly suited for HNIs seeking regular, inflation-protected income from identifiable commercial real estate.
Category I AIFs: Venture Capital and Social Impact
Category I AIFs invest in sectors SEBI considers economically desirable: startups and early-stage ventures (VC funds), SMEs, infrastructure, and social enterprises.
Minimum investment: ₹1 crore.
Lock-in: 7–10 years.
Return profile: Power-law distributed top-quartile VC funds have delivered 20–35% IRR over 10-year horizons; median performance is significantly lower. Capital is at risk in failed ventures.
Best suited for: HNIs who genuinely understand venture-stage investing, can commit capital for a decade, and can absorb potential total loss on individual positions.
Category II AIFs: Private Equity and Real Estate
Category II is India's largest AIF category, covering private equity, debt, real estate, and fund-of-funds. No leverage is permitted.
Private equity (growth stage): Top funds target 15–22% IRR over a 5–7 year lock-in. Median performance is significantly lower. There is no regular income during the hold period.
Real estate equity AIFs: These invest in development-stage projects targeting 14–20% IRR. They carry construction risk, regulatory approval risk, and sales velocity risk. There is no income until the project exits. Returns are realised at the end, not during the investment period.
Real estate debt AIFs: These lend to developers at a 14–18% coupon, usually with a lock-in of 2–4 years. They carry developer credit risk and construction completion risk.
The critical distinction from SM REITs: Category II real estate AIFs invest in development risk. SM REITs invest in already-built, already-leased, and already-income-generating commercial properties. These are fundamentally different risk profiles.
Category III AIFs: Absolute Return Strategies
Category III AIFs use complex strategies such as long-short equity, derivatives, structured credit, and arbitrage. Leverage is permitted. Some funds offer quarterly liquidity after a one-year lock-in.
Best-performing strategies have delivered 18–25% CAGR over three-to-five-year periods. However, 2022 showed drawdowns in strategies marketed as “absolute return.” The label is a target, not a guarantee.
REITs and InvITs: Exchange-Listed Income Products
India's listed REITs, including Embassy Office Parks, Mindspace, and Brookfield, manage approximately 20–40 million sq. ft. of commercial real estate. They offer distribution yields of approximately 5–7%, a minimum investment of one unit, typically priced at around ₹300–400, and daily exchange liquidity.
InvITs invest in infrastructure assets such as roads, power transmission networks, and gas pipelines. They typically offer yields of 8–11% and follow a structure similar to REITs, while carrying an infrastructure-specific risk profile.
Large REITs provide diversified commercial real estate exposure with maximum liquidity. SM REITs provide exposure to a specific, identified property, allowing investors to know the exact building, tenants, and lease terms.
SM REITs: SEBI's Framework for Specific Commercial Property Income
SM REITs are part of SEBI's 2024 framework designed specifically for the fractional commercial real estate market, which had previously operated without dedicated regulatory oversight.
Key requirements that distinguish SM REITs from other alternative investment instruments include:
- Asset-specific: Each scheme invests in a specific, identified commercial property rather than a diversified portfolio. Investors know the building, address, tenant names, lease durations, and rental terms.
- Immediate income: Properties are pre-leased, allowing rental income to begin from day one.
- SEBI-regulated: The framework includes a mandatory placement memorandum, a 90% net distributable cash flow distribution requirement, independent governance, and annual audits.
- Accessible: The minimum investment is ₹10 lakh per scheme, compared with ₹1 crore for AIFs.
- Inflation-protected: Commercial leases commonly include rental escalation of 15% every three years, which is built into the income structure.
hBits, SEBI Registration No. IN/SM-REIT/25-26/0005, is India's first SEBI-registered SM REIT. It operates under this framework and invests in Grade-A commercial properties leased to multinational tenants across major Indian cities.
For HNIs seeking regular, transparent, and inflation-protected income from specific commercial real estate without construction risk, SM REITs are the most directly appropriate alternative investment instrument available in India.
Explore SM REIT alternative investments at hBits.
Frequently Asked Questions
What is the minimum investment in an AIF in India?
The minimum investment in a SEBI-registered AIF is ₹1 crore for external investors and ₹25 lakh for fund employees and directors. SM REITs have a significantly lower threshold of ₹10 lakh per scheme, making Grade-A commercial real estate income accessible to a broader HNI audience without the ₹1 crore commitment required by AIFs.
How do SM REITs differ from Category II real estate AIFs?
Category II real estate AIFs invest in development-stage projects and carry construction risk, offer no immediate income, and typically have a five-to-seven-year lock-in before returns are realised. SM REITs invest in pre-leased, operating commercial properties and provide income from day one, transparent asset disclosure, and quarterly distributions under SEBI's 90% net distributable cash flow requirement.
SM REITs generally carry lower risk and offer lower target returns than development-focused AIFs. However, for income-focused HNIs, their contractual and immediate income profile may be more appropriate.
Which alternative investment gives the most regular income in India?
InvITs and REITs offer quarterly distributions with exchange liquidity. SM REITs also distribute income quarterly from specific Grade-A commercial properties under SEBI's 90% net distributable cash flow requirement.
Among alternative investments, SM REITs combine several income-oriented characteristics for HNIs: transparent, asset-specific exposure, an 8–9% target yield, contractual rental escalation of 15% every three years, and a minimum investment of ₹10 lakh compared with ₹1 crore for AIFs.
