Conceptual · Article 3.1.6.1

FoF — Domestic Alternatives.

AIF Pooled Access. 7-10 Year Lock-In. HNI Satellite.

Published as on 17 June 2026

A Fund of Funds — Domestic Alternatives pools your ₹1 crore commitment and invests it across multiple Indian Alternative Investment Funds (AIFs) — private equity, venture capital, real estate, infrastructure, distressed assets. SEBI-registered structure. Pass-through taxation under Section 115UB: capital gains from unlisted shares taxed at 12.5% flat post-Finance Act 2024 (no indexation). Double fee layer plus 18% GST. Capital call model — actual deployment over 2-3 years. 7-10 year lock-in. Suitable for ₹1 crore+ HNI investors as 10-15% satellite allocation only.

₹1 cr

Min Investment

7-10 yr

Lock-in Period

Double

Fee Layer + 18% GST

12.5%

LTCG (Unlisted)

Executive Summary · Page 2

Executive Summary · 6 Findings

FoF — Domestic Alternatives gives HNI investors pooled access to multiple Indian AIFs with a single ₹1 crore commitment instead of ₹1 crore per fund. Trade-off: convenience and diversification vs double layer of fees (4-5% annual with 18% GST) plus performance fees on both layers. Best as 10-15% satellite of ₹10 crore+ portfolios, never core, never as a 'sounds sophisticated' add-on.

Covers three-layer capital call structure, three AIF categories (I Cat-favourable taxation, II growth/credit, III less tax-efficient), pass-through taxation under Section 115UB, Finance Act 2024 indexation elimination, double fee layer math with 18% GST, illiquidity reality (7-10 year lock-in with dissolution period), J-curve cash flow pattern, 20 due diligence questions, and seven retail questions.

Key Findings

Pooled access — ₹1 crore covers multiple AIFs vs ₹1 crore each.

Direct AIF investment requires ₹1 crore PER fund. Diversification across 5 strategies (VC, PE, real estate, infrastructure, distressed) needs ₹5 crore. A FoF pools investor capital — your ₹1 crore commitment covers exposure across 5-15 underlying funds. Significant access advantage for HNI investors building alternative allocation.

Three AIF categories — I and II preferred for FoF, III less common.

Category I: socially/economically desirable sectors (VC, angel, SME, infrastructure, social venture). Category II: private equity, real estate, debt, distressed asset funds. Category III: complex/leveraged strategies (hedge funds, derivatives, PIPE). Most FoFs focus on Category I and II — Category III lacks pass-through tax status and is restricted for insurance companies/banks.

Pass-through taxation under Section 115UB (Category I/II).

Income flows through to you retaining original character. Finance Act 2024 (effective July 23, 2024) eliminated indexation for unlisted shares. LTCG unlisted: 12.5% flat (down from 20% with indexation). STCG unlisted: slab rate. LTCG listed equity: 12.5% above ₹1.25L exemption. Interest income: slab rate. Pass-through preserves character through both layers.

Double fee layer + 18% GST — 4-5% annual cost burden.

FoF level: 1.5-2.5% management fee + 15-20% carry above hurdle + setup fee + 18% GST on all. Underlying AIF level: 1.5-2.5% management + 15-20% carry + 18% GST. Combined annual: ~4-5% management with GST. Example: 15% gross return on ₹1 cr → after fees + carry ≈ 8.5% net. Sobering. Don't assume FoF means lower fees due to pooling.

Capital call model + 7-10 year lock-in + J-curve returns.

Not lump sum upfront. ₹1 crore commitment is drawn down in tranches (₹20L in Q1, ₹25L in Q3, etc.) over 2-3 years as opportunities found. Closed-ended Category I/II structures with 3-year mandated minimum tenure; practical 7-10 years due to underlying fund cycles. SEBI dissolution period allows liquidation post-tenure. Returns lumpy: Years 1-3 mostly outflows, Years 5-8 distributions begin, Years 8-10 wind-down.

Manager selection risk is the dominant return driver.

Performance dispersion enormous in private markets: top-quartile Indian VC 25-30% IRR vs bottom-quartile single-digit or negative. FoF manager's core job is picking the right underlying funds. Check: tenure (10-15 yr+ experience), due diligence process, value attribution from manager selection. Beware proprietary bias — FoF managers favouring own fund house's AIFs over best-in-class peers.

At A Glance

Metric	Value	Detail
Min Investment	₹1 crore	₹25L for employees
Lock-in	7-10 years	Plus dissolution
AIF Categories	I & II (FoF focus)	III rare
Tax (Cat I/II)	Pass-through	Section 115UB
LTCG Unlisted Shares	12.5% flat	Post-July 23 2024
Combined Fees	4-5%/yr	Plus 18% GST
Liquidity	None	Closed-ended
Satellite Allocation	10-15%	Of investible assets

Exhibit 01: Capital Call Lifecycle

Phase	Years	Activity
Capital Calls	1-3	Tranche deployment, J-curve starts
Investment	3-5	Mid-stage, occasional small distributions
Distribution	5-8	Exits begin, cash returned
Wind-down	8-10	Final exits, dissolution period

Returns come in lumpy, exit-driven bursts, not smooth annual income. Years 1-3 typically show capital deployed but minimal gains. The J-curve bottoms around Year 3-5 before distributions accelerate. Plan for 7-10 year capital lock-in.

The Opening · Page 3

The Opening

A Fund of Funds — Domestic Alternatives pools investor capital and invests across multiple Indian Alternative Investment Funds (AIFs). Three-layer structure: you commit capital → FoF manager allocates across 5-15 underlying AIFs → those AIFs invest in startups, unlisted companies, real estate, infrastructure. Example with ₹1 crore: ₹25L VC fund + ₹30L private equity + ₹25L real estate + ₹20L infrastructure. Exposure across multiple strategies with one commitment, vs ₹5 crore needed for direct diversification.

"FoF — Domestic Alternatives is fundamentally about pooled access — not return enhancement. The double fee layer plus 18% GST creates a 4-5% annual cost burden that compounds against you. A 15% gross return becomes ~8.5% net after both layers' management and performance fees. Manager selection skill must add at least 1.5-2% of alpha just to offset the extra cost over a direct single AIF investment."
The Pooled-Access Frame

Capital call mechanics. You commit ₹1 crore, but don't pay ₹1 crore upfront. Capital is called in tranches as underlying AIFs identify opportunities — typically ₹15-25L per call over 2-3 years. Your actual cash outflow happens gradually. Returns follow J-curve: Years 1-3 mostly outflows with minimal distributions; Years 3-5 J-curve bottoming out; Years 5-8 distribution phase as underlying funds exit (IPOs, strategic sales); Years 8-10 final wind-down with SEBI's dissolution period allowing managed liquidation.

Feb 2026 tax context. Pass-through taxation under Section 115UB for Category I and II AIFs. Finance Act 2024 (effective July 23, 2024) eliminated indexation benefits for all non-equity assets including unlisted shares. LTCG unlisted shares: 12.5% flat (was 20% with indexation). LTCG listed equity: 12.5% above ₹1.25L exemption. STCG, interest, dividends: slab rate. Phantom income risk: you may owe tax on accrued income before cash distribution.

The Honest Boundary: FoF — Domestic Alternatives is for ₹1 crore+ HNI investors with established core (equity + debt + tax-advantaged options maxed) wanting 10-15% satellite allocation to private markets they cannot access directly. Don't use if: you need liquidity within 5-7 years, you haven't maxed EPF/PPF/NPS, you're uncomfortable with 4-5% annual fees including GST, you're 'experimenting' without understanding structure, or you can't afford to lose a meaningful portion of principal.

Structure

Part I

Three-Layer Structure, AIF Categories, Capital Calls

Part II

Tax (Section 115UB), Fee Math, Finance Act 2024

Part III

Manager Selection, 20 Due Diligence Questions

Part IV

The Verdict: HNI Satellite, Never Core

Use If

✓ ₹1 crore+ HNI

✓ Core portfolio established

✓ 7-10 year horizon

✓ 10-15% satellite

Do NOT Use If

✕ Liquidity needed <7 yr

✕ Tax-advantaged options not maxed

✕ Fee-sensitive investor

✕ <₹10 crore investible

Part I

Three-Layer Structure, AIF Categories, and the Capital Call Model

The mechanics of pooled FoF investing across multiple AIFs, the three SEBI AIF categories (Category I socially desirable, Category II growth/credit, Category III complex strategies), and the capital call gradual deployment model that distinguishes alternatives from open-ended mutual funds.

Part I · Page 4

Three-Layer Structure

You invest ₹1 crore → FoF allocates → 5-15 underlying AIFs → Private market investments (startups, real estate, infrastructure, etc.)

Sample Allocation (₹1 cr)

Strategy	Allocation
Venture Capital	₹25L
Private Equity	₹30L
Real Estate	₹25L
Infrastructure	₹20L

AIF Categories

Socially/Economically Desirable

VC, Angel (₹10L per investee), SME, Infrastructure, Social Venture. Pass-through tax. FoFs commonly invest.

Growth Capital and Credit

Private equity, real estate, debt, distressed asset funds. Pass-through tax. Most common FoF allocation.

III

Complex Trading Strategies

Hedge funds, PIPE, derivatives. NO pass-through. Tax at fund level ~42.74%. Banks/insurers prohibited. Rare in FoFs.

Capital Call Model

Timeline	Activity
Q1	Commit ₹1 cr, ₹20L called
Q3	₹25L called as opportunities identified
Q5	₹15L called for new VC fund
2-3 yr	Cumulative ₹80-90L deployed

Lock-in & Liquidity

No Secondary Market — 7-10 Year Lock-in

Category I and II FoFs: closed-ended structure with minimum 3-year tenure (SEBI). Practical 7-10 years.

Why?
• Underlying PE/VC funds have multi-year cycles
• Investments need time to mature and exit
• Early redemption typically not permitted

Dissolution period: SEBI allows post-tenure liquidation runway. Returns via exit distributions or final liquidation.

J-Curve Cash Flow

Year	Net Cash Flow
1-3	Outflows (capital calls)
3-5	Minimal, J-curve bottom
5-8	Distributions begin (exits)
8-10	Wind-down, final distributions

Performance Dispersion

Indian VC	IRR Range (7-10 yr)
Top quartile	25-30%
Median	12-18%
Bottom quartile	Single-digit or negative

Unlike listed equities where most active managers cluster around the index, alternative fund outcomes vary dramatically. 20+ percentage point gap between top and bottom quartile is common.

The reframing: in private markets, manager selection IS the return driver. The FoF manager's core job — picking the right underlying funds — directly determines your outcome. Without strong manager selection skill, you'd be better off in a basic Indian equity index fund at a fraction of the cost.

Part II

Tax (Section 115UB Pass-Through), Fee Math, and Finance Act 2024 Changes

How Category I/II AIF pass-through taxation flows income through to investors retaining character, the Finance Act 2024 elimination of indexation for unlisted shares (12.5% flat LTCG), the double fee layer math with 18% GST, and phantom income risk.

Part II · Page 6

Tax — Pass-Through (Cat I/II)

Section 115UB Pass-Through

Income flows through to investors retaining original character — LTCG remains LTCG, interest remains interest, etc.

Critical Finance Act 2024 change: indexation eliminated for unlisted shares effective July 23, 2024.

Post-July 23 2024 Rates

Income Type	Tax Rate
LTCG unlisted shares	12.5% flat (no indexation)
STCG unlisted	Slab rate
LTCG listed equity	12.5% above ₹1.25L exemption
STCG listed equity	20%
LTCG real estate/gold	12.5% (no indexation)
Interest income	Slab rate
Dividends	Slab rate
Business income (if any)	Fund-level MMR ~42.74%

Tax Example (Pass-Through)

FY 2025-26 distributed income:

₹5L LTCG unlisted (12.5%) = ₹62,500

₹3L LTCG listed eq (12.5% above ₹1.25L exempt) = ₹21,875

₹2L interest (30% slab) = ₹60,000

Total tax: ₹1,44,375 on ₹10L

Category III Fund-Level Taxation

All income (cap gains, interest, dividends, business) taxed at FUND LEVEL at Maximum Marginal Rate ~42.74% (incl surcharge + cess). You receive only post-tax distributions, tax-free in your hands. Example: ₹10L fund gains → ₹4.27L tax → ₹5.73L to you.

Double Fee Layer + 18% GST

4-5% Annual Cost Burden

FoF Level:
• Management 1.5-2.5%/yr
• Performance 15-20% above 8-10% hurdle
• Setup 1-2% (often capped/negotiable)
• 18% GST on all

Underlying AIF Level:
• Management 1.5-2.5%/yr
• Performance 15-20%
• 18% GST

Example with GST (₹1 cr)

Component	Amount
FoF mgmt 2%	₹2L + GST ₹36K
Underlying mgmt 2%	₹2L + GST ₹36K
Total mgmt + GST (Year 1)	₹4.72L (4.72%)

15% Gross Return Math

Stage	Amount
Gross return	₹15L
- Mgmt fees + GST	₹4.72L
After mgmt	₹10.28L
- FoF carry	~₹54K
- Underlying carry	~₹1.18L
Net to you	~₹8.56L (8.56%)

Phantom Income Risk

In pass-through structure, you may owe tax on income that accrues at fund level BEFORE cash is distributed. Plan tax liquidity separately — don't assume distributions cover tax dues.

The cost reality: 15% gross becomes ~8.5% net after double fees plus GST. Over 7-year hold, the compounding difference vs simple equity index (12-14% CAGR) is substantial. Manager selection must add 1.5-2%+ alpha just to offset extra cost over a direct single AIF.

Part III

Manager Selection, Performance Dispersion, and the 20 Due Diligence Questions

Why manager selection drives 50%+ of FoF returns, the enormous performance dispersion in private markets (20+ percentage points between top and bottom quartile), and the structured 20-question due diligence framework before committing ₹1 crore.

Part III · Page 8

Manager Evaluation Framework

Tenure (10-15+ yr Experience)

FoF managers with limited track record or relationship-based allocation are red flags. Look for institutional history.

Due Diligence Process

How many funds reviewed? Criteria? On-site visits? Reference checks? Forensic analysis of past performance?

Performance Attribution

How much value has manager selection added historically? Net returns after all fees + GST over full cycles.

Skin in the Game

SEBI requires Cat I/II sponsors 2.5% or ₹5 crore (whichever lower). Cat III: 5% or ₹10 crore. Manager investing beyond minimum signals alignment.

Sample 20 DD Questions

About Manager: Track record net of all fees + GST? Due diligence process? How many underlying funds? Investment pace (2-3 yr deployment)? Skin in the game beyond SEBI minimum?

About Fees: Total all-in costs including GST? Performance fee mechanics (hurdle, catch-up, high-water)? Fee rebates from underlying funds?

About Strategy: AIF categories? Sector/stage/geography diversification? Cash flow profile?

About Operations: Legal structure? Exit provisions? Reporting frequency? Conflict-of-interest management?

Allocation Sizing

Portfolio	Domestic Alt FoF
₹2 cr	0% (too small for satellite)
₹5 cr	5-7% (₹25-35L)
₹10 cr+	10-15% (₹1-1.5 cr)

Six Common Mistakes

Over-Allocation Due to Novelty

"Sounds sophisticated, 30% allocation." 3-4% annual fees on large allocation destroys wealth. Start 3-5%, increase only with conviction.

Ignoring Master Fund Strategy

"Global Alternatives Fund" without reading what underlying does. Global macro hedge ≠ global infrastructure. FoF label hides critical details. Read PPM.

Treating as 'Hedge'

"100% Indian equity, 10% alternatives as hedge." Most alternatives are diversifiers, not hedges. Won't necessarily rise when equities fall.

Expecting Steady Monthly Returns

"Global REIT FoF for 0.7% monthly dividend like MIP." Alternative distributions are irregular, exit-driven, lumpy. Not income substitute.

Confusing Low Liquidity with Low Risk

"Quarterly redemption only, so safer than daily-redemption funds." Redemption frequency ≠ risk. Quarterly funds can be riskier.

Replacing Core Equity

"Skip Indian equity funds, go all alternatives." Wrong. Core equity (70-80%) + small FoF (5-10%) is the framework.

Return Expectations

Outcome	Net IRR (after fees + GST)
Top-quartile underlying	14-16%
Median underlying	11-14%
Bottom-quartile	5-10% or negative
Nifty 50 reference	12-14% CAGR (15-20 yr)

Calibration: for FoF to justify illiquidity + fees, target 14-16% net IRR. Below 12-14% (active equity MF returns), the structure adds complexity without compensation. Beware managers projecting 25-30% — top-decile only, very rare.

Part IV

The Verdict

HNI satellite, manager-selection-driven, illiquid by design.

Part IV: The Verdict · Page 10

30-Second Summary

Fund of Funds — Domestic Alternatives provides HNI investors pooled access to multiple Indian Alternative Investment Funds (AIFs) with a single ₹1 crore commitment vs ₹1 crore each for direct diversification. Three-layer structure with capital call gradual deployment over 2-3 years. 7-10 year practical lock-in. Pass-through taxation under Section 115UB for Category I/II AIFs — Finance Act 2024 eliminated indexation, making LTCG on unlisted shares 12.5% flat.

Double fee layer (FoF + underlying AIFs) plus 18% GST creates 4-5% annual cost burden. 15% gross returns become ~8.5% net after both layers' management and performance fees. Manager selection is the dominant return driver — performance dispersion in private markets is enormous (top-quartile 25-30% IRR, bottom-quartile single-digit or negative). Best as 10-15% satellite of ₹10 crore+ portfolios where core equity, debt, and tax-advantaged options (EPF, PPF, NPS) are already established.

"FoF — Domestic Alternatives is an access structure for HNI investors, not a return enhancer. The pooling advantage (₹1 crore covers multiple AIFs) and manager-selection expertise must compensate for the 4-5% annual cost burden and 7-10 year illiquidity. Sized correctly as 10-15% satellite, with rigorous manager due diligence, it adds genuine diversification. Sized incorrectly or chosen for novelty, it destroys wealth at 4-5%/year compounded over a decade."
The Final Orientation

The Bottom Line: Use FoF — Domestic Alternatives only if: ₹1 crore+ for genuinely long-term capital (7-10 yr), core equity + debt + tax-advantaged options established, comfortable with 4-5% annual fees including GST, allocation ≤10-15% of total investible assets, manager passes rigorous 20-question due diligence. Don't use if: liquidity needed within 5-7 years, tax-advantaged options not maxed (these first), fee-sensitive, investing because 'sounds sophisticated', or can't afford meaningful principal loss. The Category III sub-structure (hedge funds) is generally inferior to Category I/II for tax efficiency.

ADWIZR · June 2026

Decision Rules

Use Correctly As

✓ 10-15% satellite (₹10 cr+)

✓ 7-10 yr horizon

✓ Category I/II focus

✓ After tax-advantaged maxed

Misuse Destroys Value

✕ Core portfolio replacement

✕ Liquidity needed

✕ Fee-sensitive investor

✕ Without 20-question DD

Triggers to Reassess

When to Open the Factsheet Again

(1) Major underlying AIF underperforms — check fund quality, manager response. (2) Sector concentration emerges — request portfolio rebalancing or exit. (3) Manager change at FoF level — track record resets; serious reconsideration. (4) Tax law changes — Finance Act 2024 precedent shows tax structure can change materially.

₹1 cr

Min commitment

Per FoF

7-10 yr

Lock-in

Closed-ended

10-15%

Of investible

Satellite max

Investor FAQ

Questions Indian Investors Ask

Seven questions, answered directly.

Investor FAQ · Page 12

Frequently Asked Questions

Q1 Can I withdraw if I urgently need money?

No. Closed-ended vehicles with 7-10 year practical lock-ins. No secondary market for units. Some FoFs may offer limited liquidity windows with penalties or discounted valuations, but not guaranteed. SEBI dissolution period allows post-tenure liquidation. Ensure emergency funds elsewhere — never invest capital you might need within 7 years.

Q2 How different from direct AIF investment?

Direct AIF: ₹1 crore per fund, 5 strategies = ₹5 crore. FoF: pools your ₹1 crore across multiple AIFs. Extra fee layer with GST. Less transparency (don't see individual holdings, only aggregate). Choose direct if ₹3-5 crore+ for alternatives + manager expertise. Choose FoF if ₹1-2 crore + want professional manager selection.

Q3 Section 80C deductible?

No. FoF — Domestic Alternatives do NOT qualify for any tax-saving provisions (80C ELSS, 80CCD NPS). Purely investment vehicles. Tax arises only on income earned. Pass-through Category I/II: 12.5% LTCG on unlisted shares. Category III: ~42.74% fund-level taxation.

Q4 What if FoF manager shuts down?

SEBI regulations require defined process for material changes including manager replacement. Steps: inform investors, exit option at fair value (might be discounted mid-cycle), majority vote on continuation, wind-up if voted down. Read PPM carefully — check governance and exit provisions. Sponsor's financial stability and reputation matter.

Q5 How to evaluate FoF manager?

Look for: (1) Net returns track record over 7-10 yr full cycle. (2) Detailed due diligence process. (3) Stable investment team 5+ yr together. (4) Transparency on performance attribution. (5) Personal capital committed beyond SEBI minimum. (6) Independent references from existing investors (2-3 from 5+ yr in fund). Don't rely on marketing materials or bull-market performance alone.

Q6 Can NRIs invest?

Yes, subject to FEMA and SEBI norms. Check PPM permits NRIs. Use NRE/NRO account. Enhanced KYC, valid passport, PAN. 10% TDS on pass-through income (subject to DTAA). Need Tax Residency Certificate. File taxes both India and country of residence (DTAA usually provides credit). Cross-border tax advisor strongly recommended.

Q7 Minimum investment and follow-on commitments?

₹1 crore for regular investors (₹25L employees/directors, ₹10L per investee for Angel Funds). Accredited Investors (₹7.5cr investible assets or ₹2cr income) access Large Value Funds at ₹70cr+ minimums. Capital commitment, not immediate cash — capital calls in tranches over 2-3 yr. Some FoFs allow additional commitments during fundraising period (12-24 months after launch); most don't accept after fundraising closes.

Key Terms & Definitions

Fund of Funds — Domestic Alternatives

A SEBI-registered pooled investment vehicle that invests in multiple Indian Alternative Investment Funds (AIFs) — private equity, venture capital, real estate, infrastructure, distressed assets — rather than directly buying private companies or assets. Structured as trust (most common), LLP, or company.

Alternative Investment Fund (AIF)

SEBI-regulated pooled investment vehicle for HNI investors (₹1 crore minimum). Three categories under SEBI (Alternative Investment Funds) Regulations, 2012: Category I (socially/economically desirable), Category II (private equity, credit), Category III (complex/leveraged strategies). FoFs typically focus on Category I and II for pass-through tax treatment.

Capital Call Model

Capital deployment mechanism where investor's ₹1 crore commitment is NOT taken upfront. FoF manager calls capital in tranches (₹15-25L typically) as underlying AIFs identify investment opportunities, spreading actual cash outflow over 2-3 years. Reduces uninvested cash drag.

Pass-Through Taxation (Section 115UB)

Tax treatment for Category I and II AIFs where income flows through to investors retaining its original character. LTCG remains LTCG, interest remains interest, etc. Post-Finance Act 2024: unlisted share LTCG at 12.5% flat (indexation eliminated), listed equity LTCG at 12.5% above ₹1.25L exemption.

J-Curve Returns

The cash flow pattern typical of FoF — Domestic Alternatives. Years 1-3 mostly capital outflows (calls) with minimal distributions. Years 3-5 J-curve bottoming. Years 5-8 distribution phase as underlying funds exit. Years 8-10 wind-down with SEBI dissolution period. Returns lumpy, exit-driven, not smooth annual income.

Performance Dispersion

The enormous gap between top-quartile and bottom-quartile AIF managers in private markets — often 20+ percentage points per year of IRR. Top-quartile Indian VC: 25-30% IRR over 7-10 yr. Bottom-quartile: single-digit or negative. Unlike listed equities where most active managers cluster around the index. Manager selection is the dominant return driver.