MF alpha erosion accelerates capital shift to PMS & Cat-III AIFs; domestic HNIs now dominate alternatives

Mutual Fund

A new deep-dive on India’s alternative investment landscape shows that mutual fund alpha erosion has become structural and wealthy investors are voting with their capital. IVCA-360 ONE CRISIL’s latest report states plainly that the “decline in alpha generation of equity mutual funds since 2017, and the notable decline in yields of a majority of debt mutual funds… have prompted investors to search for alternative asset classes such as AIFs and PMS.”

The shift underlines a fundamental reconfiguration of how domestic investors, particularly HNIs, ultra-HNIs and family offices conceptualise public-market exposure. And the alternatives drawing their attention are not offshore funds or late-stage private vehicles but Category III AIFs and PMS, both of which sit squarely inside the public-markets ecosystem, operate with higher flexibility than MFs, and are showing measurably superior two- and three-year outcomes.

One of the findings in the report is that equity-linked AIF strategies, specifically those operating with listed and listed-plus-unlisted mandates, have consistently beaten the BSE Sensex PME+ benchmarks across six consecutive evaluation cycles from March 2022 to September 2024.

The pooled IRRs tell the story unambiguously:

While mutual funds have struggled to extract alpha from broader indices amid institutionalisation and market efficiency, equity AIFs (particularly those with Cat-III-style flexibility) have preserved meaningful outperformance.

For HNIs and family offices, this is not lost. These investors now anchor the majority of AIF inflows, indicating a clear preference for concentrated, rules-based, high-conviction equity exposure over traditional diversified MF structures. PMS platforms that are closer in spirit to active stock-picking benefit from the same shift.

This reallocation is happening on top of another structural shift: alternatives in India are no longer foreign capital–driven. Domestic LP share has increased from 50.3% (March 2024) to 52.7% (March 2025), an inflection point that the report flags as critical. Behind this rise are the exact investor categories that dominate India’s public markets: HNIs, Ultra-HNIs, Family offices, and Wealth-management platforms. Together, they contributed ₹72,667 crore of incremental domestic commitments over the period.

This matters because the same investor cohort that drives PMS flows, IPO subscriptions, high-conviction equity trades, long-short fund allocations and F&O-linked yield strategies is now allocating more to AIFs than ever before. Domestic wealth is funding India’s alternatives engine, not global funds.

The capital stack is also institutionalising. Government entities like SIDBI, NIIF, EDF, TDB, BIRAC and NABARD together contribute ₹24,293 crore, which is a meaningful national-level endorsement of alternatives as part of India’s financial architecture.

While performance is the core driver, regulation has accelerated the shift by making AIF structures cleaner, more transparent and more MF/PMS-like. The report highlights five major reforms between 2023 and 2025:

Dematerialisation of AIF units (2023): bringing operational parity with listed securities.

Standardised valuation norms: creating comparability across PMS, MFs and AIFs.

Direct plan + trail-only commission model (2024): reducing cost leakages and improving governance across distribution channels.

Removal of the priority distribution model: crucial for long-short and structured Cat-III products with complex waterfalls.

CIV-based co-investment structure (2025): allowing cleaner participation for family offices and portfolio investors.

These changes reduce friction, enhance transparency, align incentives and remove legacy structures that prevented wider participation from mainstream HNI public-market investors.

The public market cycle itself is providing strong tailwinds. India has averaged one IPO per day for two consecutive fiscal years—234 in FY25 and 119 in FY26 till September. The report links this high-velocity primary market to stronger exit visibility for equity-linked AIF strategies. In practice, this means better valuation discovery, easier monetisation, and faster DPI.

Distribution data in the report indicates that many Indian AIFs, especially those with market-linked or short-duration mandates, have achieved significant capital returns within typical fund lives.

Debt AIFs return 50% of capital in 3.1 years while real estate AIFs in 4.2 years. 28.4% of debt AIFs and 34% of real estate AIFs have fully returned investor capital (100% DPI)

For family offices, whose portfolio construction moves dynamically with liquidity, these cashflows often cycle back into PMS, Cat-III funds or public-market primary issuances. The loop reinforces itself.