AIF Due Diligence Checklist: Checks Before You Commit

The private placement memorandum arrives as a glossy hundred-page PDF with a closing date and a request for your ₹1 crore commitment. The deck is persuasive, the manager is charming, and the deadline is always next week. That pressure is exactly why due diligence matters: an AIF is a decade-long relationship governed by a document most investors never finish reading. This checklist turns that document into twelve specific checks, each anchored to a rule SEBI already wrote.

Nothing here is a substitute for the complete PMS and AIF guide on this site, which explains the product mechanics. This post is the pre-signature filter: what to demand, what to verify, and what should end the conversation.

Check 1: the PPM reached you before the commitment

The manager must provide the private placement memorandum to you before you commit, and take an acknowledgement of receipt from you. Source: SEBI Master Circular for Alternative Investment Funds, last updated September 7, 2026, paragraph 3.2.2, implementing circular CIR/IMD/DF/7/2015 of October 1, 2015.

The PPM itself must follow a SEBI-specified template — Part A carries the minimum disclosures, Part B holds whatever extra the fund adds. It is filed with SEBI through a SEBI-registered merchant banker, who certifies due diligence on the disclosures. Source: AIF Master Circular, paragraphs 2.1.1-2.1.3 and 2.4.1. Three structures escape the template: angel funds, schemes where every investor commits at least ₹70 crore and signs a waiver, and Large Value Funds. Source: AIF Master Circular, paragraph 2.1.4. If your fund is an AI-only or Large Value structure, there is no merchant-banker vetting — you are the vetting, by design.

Two hard rules sit alongside: the contribution agreement you sign cannot contain terms that go beyond the PPM (paragraph 3.2.4), and no AIF may offer assured or guaranteed returns (paragraph 3.2.3). A verbal promise of around 15% with downside protection is not just optimistic — it is a regulatory red flag you should treat as disqualifying.

Check 2: read the distribution waterfall like your money depends on it

Every PPM must contain a detailed tabular example of how fees and charges apply, including the distribution waterfall — the exact order in which your capital, the preferred return, the manager's carry and expenses come out. Source: AIF Master Circular, paragraph 2.2.1. If the waterfall table is missing or abstract, the manager has not done the work SEBI mandates — ask why.

Run your own arithmetic on their example. A Category II private equity fund charging a market-standard 1.75% management fee on committed capital of ₹10 crore collects ₹17.5 lakh a year — ₹87.5 lakh over a five-year commitment period, before a rupee of carry. At a 14% gross IRR over that period, the 20% carry above an 8% hurdle then takes roughly a further ₹30-35 lakh. The strategy has to earn back ₹1.2 crore before your net return looks like the brochure's gross one. Fee ranges are market practice, not regulated caps — SEBI does not cap AIF fees; the PPM states the actual stack. Source: SEBI AIF FAQ, accessed 3 November 2026; SEBI (AIF) Regulations, 2012.

Check 3: the sponsor's skin in the game

Regulation 10(d) requires the sponsor or manager to keep a continuing interest in the fund, not funded by waiving their own fees: at least 2.5% of the corpus or ₹5 crore, whichever is lower, for Categories I and II; 5% of the corpus or ₹10 crore for Category III. Source: SEBI (AIF) Regulations, 2012, Regulation 10(d), as confirmed in the compliance-test table of the AIF Master Circular, September 7, 2026.

The legal minimum is a floor, not a credential. Ask what the manager has actually committed relative to fund size, and whether their co-investment sits in the main scheme (same terms as you) or in a separate co-investment vehicle with different economics. On co-investment: Category I and II managers can co-invest accredited investors through a CIV scheme, capped at three times the investor's contribution through the main scheme in that investee company. Source: AIF Master Circular, paragraphs 6.1.1-6.1.4.

Check 4: disciplinary history, in writing

The PPM must include the disciplinary history of the AIF, the sponsor, the manager, their directors, partners, promoters and associates, and — for trust structures — the trustees: pending and past litigation, regulatory penalties, defaults on statutory dues and bank dues, and any SEBI or other regulatory action. Source: AIF Master Circular, paragraph 2.2.2, implementing Regulation 11(2). Read this section first, not last. A clean history does not guarantee competence; a patchy one predicts attention.

Check 5: the track record, benchmarked

Every AIF must report investment-wise valuation and cash-flow data to SEBI-notified benchmarking agencies, and wherever past performance appears in a PPM or marketing material, performance against the benchmark must appear with it. Source: AIF Master Circular, paragraphs 8.11 and 22.3.1. The industry you are diligence-ing is large: cumulative AIF commitments reached ₹17.5 lakh crore by June 2026, up 23.6% in a year. Source: SEBI Monthly Bulletin, September 2026.

Ask for the scheme-level record against its stated benchmark since inception — not since a convenient re-launch, not a cherry-picked peer set. A three-year record on a strategy described as a ten-year process is a marketing decision, and you should price it as one.

Check 6: the valuation regime you are buying into

Category I and II funds value investments at least once every six months — extendable to once a year with approval of 75% of investors by value. Category III closed-ended schemes publish NAV quarterly; open-ended ones monthly. Source: AIF Master Circular, disclosure timeline table, September 7, 2026. Listed securities are marked at closing prices; unlisted investments are valued by an independent valuer applying IPEV-endorsed standards. Source: AIF Master Circular, paragraphs 18.1.1-18.1.2.

If you need marks more often than that, an AIF is the wrong wrapper. Our comparison post against mutual funds — which publish a NAV daily — covers that gap in detail.

Check 7: units in demat, assets in demat

AIF units must be issued in dematerialised form, and AIF investments themselves must be held in demat, with narrow carve-outs for investees that cannot yet be dematerialised. Source: AIF Master Circular, paragraphs 11.1 and 11.6, implementing Regulation 10(aa). Non-receipt of your demat credit is an early warning sign, not a back-office hiccup.

Check 8: the exit terms in the PPM, not the pitch

Category I and II schemes are close-ended with a minimum three-year tenure; extensions run up to two years with two-thirds investor approval — and AI-only schemes may extend to five years in total. Source: SEBI (AIF) Regulations, 2012; AIF Master Circular, paragraph 2.6.3. Each scheme must hold a corpus of at least ₹20 crore; an open-ended Category III scheme that falls below ₹20 crore must report to SEBI within two working days, restore corpus within three months, or wind up and redeem every investor. Source: AIF Master Circular, paragraph 7.6 and Regulation 10(b).

Match that to your actual liquidity need: exits happen at defined windows, on secondary transfer, or at wind-up distributions. Treat the ticket as money you will not see for the scheme's full term.

Check 9: the accreditation claim, verified

If the fund markets itself as AI-only or offers you accredited-investor pricing, verify the accreditation itself. An individual qualifies with annual income of ₹2 crore or more; or net worth of ₹7.5 crore including at least ₹3.75 crore in financial assets; or income of ₹1 crore plus net worth of ₹5 crore including at least ₹2.5 crore in financial assets. Non-family trusts and body corporates need net worth of ₹50 crore. Accreditation agencies are stock-exchange subsidiaries — CDSL Ventures (CVL) and NDML today — and a certificate earned on one year's numbers is valid two years, or three if the criteria were met in each of the two preceding years. Source: AIF Master Circular, paragraphs 10.1.3, 10.2.1 and 10.4, accessed 3 November 2026.

Worked example of how the three routes interact: a reader with net worth ₹8 crore, of which ₹3 crore is financial assets, and salary of ₹1.2 crore fails the net-worth route (needs ₹3.75 crore financial) and the income route (needs ₹2 crore), but qualifies on the combined route (income above ₹1 crore, net worth above ₹5 crore with financial assets above ₹2.5 crore). The arithmetic decides — not the relationship manager's opinion.

Check 10: the leverage answer, in one number

Category II funds cannot borrow or leverage beyond day-to-day operational needs — at most 10% of investable funds, for not more than 30 days, on not more than four occasions in a year. Source: AIF Master Circular, paragraph 14.1.1. Category III funds may leverage up to two times NAV. Source: AIF Master Circular, paragraph 7.2.3. Ask each manager to state their current gross exposure against NAV; the answer's precision tells you whether leverage is a tool or a temperament.

Check 11: reporting you will actually receive

Material risks — concentration, leverage, realisation, strategy — must be disclosed within 180 days of year-end for Categories I and II, and within 60 days of quarter-end for Category III. Annual compliance with the PPM's terms is audited. Source: AIF Master Circular, disclosure timeline table and paragraph 21.3. Put the reporting calendar in your own diary at signing; the six-monthly valuation you never see cannot be diligence.

Check 12: your escalation path

Grievances go first to the fund's investor-relations desk in writing, then to SEBI's SCORES portal, and through SEBI's ODR mechanism if unresolved. Keep the PPM, the contribution agreement and every acknowledgement — the demat credit note is your unitholding proof, and the acknowledgement of PPM receipt (Check 1) is your evidence the process ran in order.

The required contents, in one place:

What goes wrong when this checklist is skipped

• The waterfall surprises. Investors discover the management fee was charged on committed capital from first close, not deployed capital — and that carry crystallised before their capital came back. The tabular example in the PPM (Check 2) exists precisely to surface this.
• The extension surprises. A 3+2 year fund becomes 3+2+2 after a two-thirds vote you skipped. Read the extension clause and decide now how you will vote.
• The tax bill without cash. Category I/II income is deemed credited to you each financial year whether distributed or not, with 10% TDS on distributions. Our PMS and AIF taxation post works through Section 115UB. Budget for slab-rate tax on an interest-earning credit fund that pays nothing.
• The template-exempt fund. AI-only and Large Value structures skip merchant-banker vetting. Fewer guardrails for presumed-sophisticated investors means Checks 2 through 8 carry the entire load.

The one-line summary

The PPM is the product. If the waterfall table, disciplinary history, benchmarked track record and exit terms are all present, precise and consistent, you have done the diligence SEBI expects. If any of them is fuzzy, the fund is asking you to underwrite the fuzziness — with ₹1 crore.

This is educational content, not investment advice. Consult a SEBI-registered advisor for decisions specific to your situation.