AIF for HNIs — Private Credit and Category II in Practice

Private credit is the largest slice of India's AIF market by commitments — but it works genuinely differently from anything a retail debt mutual fund investor is used to. Here's what to actually expect.

Why Private Credit Dominates Category II

Category II AIFs hold over 75% of India's total AIF commitments, and private credit — direct lending to companies, typically those without easy access to traditional bank financing — represents a substantial share of that. For HNIs, this has become a genuine alternative to traditional fixed income, offering potentially higher yields in exchange for illiquidity and credit risk that a bond mutual fund investor doesn't typically encounter in the same form.

How Private Credit Actually Differs From a Bond Fund

Understanding Capital Calls — A Genuinely Different Mechanic

Many Category I/II AIFs, private credit funds included, don't take your full committed capital upfront. Instead, you commit a total amount, and the manager "calls" portions of it over time as specific investment opportunities are identified and executed. This means a ₹1 crore commitment isn't necessarily ₹1 crore invested (and earning returns) starting tomorrow — a meaningful difference from a lump-sum mutual fund purchase that many first-time AIF investors don't fully anticipate. Understanding your specific fund's capital call schedule and being prepared for it (having the committed capital available when called, not invested elsewhere and illiquid) is a real, practical planning requirement.

What Drives Returns in Private Credit

Returns come from the negotiated interest rate and structuring terms on each loan the fund makes — often higher than comparable public bond yields, reflecting both the illiquidity premium and the credit risk of lending to companies that couldn't access cheaper traditional financing. This isn't automatically a red flag — plenty of creditworthy mid-sized companies use private credit for legitimate reasons (speed, flexibility, avoiding public disclosure) — but it does mean genuine credit risk assessment matters more here than in a diversified public bond fund.

What to Actually Ask About a Specific Private Credit AIF

• What's the fund's capital call schedule, and how much certainty do you have about timing?
• What's the underlying borrower profile — sector concentration, credit quality, typical loan size?
• What's the fund's track record on defaults or restructurings, not just headline returns?
• What's the actual lock-in and any early-exit provisions, and how realistic is relying on them?
• How is the portfolio valued between capital events, and how conservative or aggressive is that methodology?

Tax Treatment Reminder

As covered in our AIF category comparison, Category II AIFs use pass-through taxation — gains and income flow to you directly, taxed according to their character (interest income, capital gains) rather than being taxed at the fund level. This is a genuine advantage over Category III's fund-level maximum marginal rate taxation, worth factoring into any private-credit-specific AIF comparison.

The Bottom Line

Private credit through a Category II AIF is a genuinely different animal from a bond mutual fund — the illiquidity, capital call mechanics, and direct credit exposure require real diligence on the specific fund's underlying loan book and manager track record, not just a headline yield comparison against public fixed income alternatives.