810
11 days ago
Tata AMC exits AIFs amid tax pressure, specialized fund competition
Summary
Tata Asset Management Company has shut down its Category III alternative investment fund (AIF) business citing unfavourable taxation and stiff competition from specialized investment funds (SIFs), according to two people familiar with the matter.
“It didn’t make sense to keep the AIF with the current tax structure as the post-tax return was low. SIFs offer better tax and higher returns,” an executive at an asset management company (AMC) said on the condition of anonymity.
AIFs are privately pooled investment funds that invest in alternative assets such as private equity, hedge funds and other non-traditional investments beyond traditional stocks and bonds, with wealthy individuals and institutions as their main investors. Regulated by the Securities and Exchange Board of India (Sebi), there are three categories of AIFs in the country, with Category III AIFs focusing on high-risk, high-return trading strategies using leverage.
Tata AMC entered the Category III AIF space in 2019 with its Absolute Return Fund, a conservative long-short strategy. In 2020, it launched the Equity Plus Absolute Return Fund. Both vehicles offered hedge fund–style strategies, long-short equity with limited leverage, targeted at high-net-worth investors.
“They are planning to return investors' money by March. A letter to clients was sent on 17th February about the closing of the fund, and the same was disclosed to Sebi,” the executive cited above said.
Category III AIFs received commitments worth ₹3.11 trillion and raised a total of ₹1.96 trillion as of December 2025, according to Sebi.
“You speak to any HNI (high-net-worth individual), they will always invest in the more tax-efficient fund. It doesn't make sense with taxation to keep the AIF. SIFs were a major reason why the absolute return fund was shut down,” said the second of the two persons cited earlier.
"Tata Asset Management has initiated an orderly liquidation of Tata Absolute Return Fund (TARF) and Tata Equity Plus Absolute Return Fund (TEPA), Category III Funds following a strategic review of the funds’ structural considerations, including taxation, minimum investment thresholds, and the emergence of Specialized Investment Funds," said a company spokesperson in response to Mint's queries.
SIFs are expected to grow as more mutual funds step in to launch the product. The category garnered net assets under management (AUM) of ₹6,564.24 crore as of January, a three-fold jump from October 2025, according to the Association of Mutual Funds in India (Amfi).
There are a total of 10 SIFs in the country with nine more in the pipeline. Some of the leading mutual funds that run SIFs include Quant Mutual Fund, SBI Mutual Fund and ICICI Prudential AMC.
The decision to shut down both AIF funds comes months after Tata launched their SIF, called Titanium SIF, with a hybrid long-short fund. Industry participants said SIFs offer a better tax profile with similar strategies as a Category III AIF, with the added bonus of a lower entry barrier.
SIFs sit between traditional mutual funds and portfolio management services (PMS) with a minimum investment threshold of ₹10 lakh.
“The total universe for investors who can invest ₹10 lakhs is far higher than the universe of people who can put in a crore. SIFs have that advantage also,” said Siddarth Pai, founding partner, chief financial officer, and environmental social and governance (ESG) officer of 3one4 Capital, a venture capital firm.
Taxation in the two products also differs massively. While Category III AIFs are taxed on the fund level before releasing the income to investors, SIFs are taxed according to long- or short-term capital gains. This means that the former ends up paying twice as much tax as a specialized fund.
According to experts, this is how the tax treatment differs: Consider a Category III AIF that generates a 15% pre-tax return. If taxed at 39%, nearly 6 percentage points are paid out as tax, reducing the post-tax return to around 9%. By contrast, if an SIF earns 11% and pays an effective 15% long-term capital gains tax including surcharge and cess, the tax outgo is 1.65 percentage points, leaving a comparatively higher post-tax return of roughly 9.35%.
In effect, despite delivering 4 percentage points lower pre-tax returns, the SIF investor can end up with a superior post-tax outcome. This arithmetic has become harder for wealthy investors to ignore, as they increasingly evaluate products on a post-tax basis.
“Investors are shifting out of an AIF and into an SIF since the first SIF was launched. It has already started,” said Pai.
Tata AMC is not the first to shut down its AIF due to the prevailing taxation structure. KKR-backed Avendus Capital wrapped up its Absolute Return and Enhanced Return funds as the strategy failed to generate scale due to taxation and regulatory reasons.
The strategies introduced in SIFs are also similar to those available in a Category III AIF.
“I think SIF in that sense is a category which is a very, very direct competition for AIFs because the categories of SIF compete very closely with what Category III AIFs are currently doing,” said Nikhil Ranka, chief investment officer- equity alternatives at Nuvama AMC.
SIFs can be launched in equity, hybrid and debt categories with the advantage of using the long-short strategy. A Category III AIF can launch a long-only fund, similar to a large-cap mutual fund, and a long-short fund.
The hybrid long-short SIF, which has seen the most traction in the segment, starkly resembles an absolute return fund in AIFs. Hybrid long-short funds balance equity and debt while allowing some short exposure. On the other hand, an absolute return AIF aims to generate consistent, absolute gains using complex strategies, including hedging, short selling, and derivatives.
“SIFs will definitely see more participation in the days to come as product acceptance increases and people become more familiar with it,” said Ranka.
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“It didn’t make sense to keep the AIF with the current tax structure as the post-tax return was low. SIFs offer better tax and higher returns,” an executive at an asset management company (AMC) said on the condition of anonymity.
AIFs are privately pooled investment funds that invest in alternative assets such as private equity, hedge funds and other non-traditional investments beyond traditional stocks and bonds, with wealthy individuals and institutions as their main investors. Regulated by the Securities and Exchange Board of India (Sebi), there are three categories of AIFs in the country, with Category III AIFs focusing on high-risk, high-return trading strategies using leverage.
Tata AMC entered the Category III AIF space in 2019 with its Absolute Return Fund, a conservative long-short strategy. In 2020, it launched the Equity Plus Absolute Return Fund. Both vehicles offered hedge fund–style strategies, long-short equity with limited leverage, targeted at high-net-worth investors.
“They are planning to return investors' money by March. A letter to clients was sent on 17th February about the closing of the fund, and the same was disclosed to Sebi,” the executive cited above said.
Category III AIFs received commitments worth ₹3.11 trillion and raised a total of ₹1.96 trillion as of December 2025, according to Sebi.
“You speak to any HNI (high-net-worth individual), they will always invest in the more tax-efficient fund. It doesn't make sense with taxation to keep the AIF. SIFs were a major reason why the absolute return fund was shut down,” said the second of the two persons cited earlier.
"Tata Asset Management has initiated an orderly liquidation of Tata Absolute Return Fund (TARF) and Tata Equity Plus Absolute Return Fund (TEPA), Category III Funds following a strategic review of the funds’ structural considerations, including taxation, minimum investment thresholds, and the emergence of Specialized Investment Funds," said a company spokesperson in response to Mint's queries.
SIFs are expected to grow as more mutual funds step in to launch the product. The category garnered net assets under management (AUM) of ₹6,564.24 crore as of January, a three-fold jump from October 2025, according to the Association of Mutual Funds in India (Amfi).
There are a total of 10 SIFs in the country with nine more in the pipeline. Some of the leading mutual funds that run SIFs include Quant Mutual Fund, SBI Mutual Fund and ICICI Prudential AMC.
The decision to shut down both AIF funds comes months after Tata launched their SIF, called Titanium SIF, with a hybrid long-short fund. Industry participants said SIFs offer a better tax profile with similar strategies as a Category III AIF, with the added bonus of a lower entry barrier.
SIFs sit between traditional mutual funds and portfolio management services (PMS) with a minimum investment threshold of ₹10 lakh.
“The total universe for investors who can invest ₹10 lakhs is far higher than the universe of people who can put in a crore. SIFs have that advantage also,” said Siddarth Pai, founding partner, chief financial officer, and environmental social and governance (ESG) officer of 3one4 Capital, a venture capital firm.
Taxation in the two products also differs massively. While Category III AIFs are taxed on the fund level before releasing the income to investors, SIFs are taxed according to long- or short-term capital gains. This means that the former ends up paying twice as much tax as a specialized fund.
According to experts, this is how the tax treatment differs: Consider a Category III AIF that generates a 15% pre-tax return. If taxed at 39%, nearly 6 percentage points are paid out as tax, reducing the post-tax return to around 9%. By contrast, if an SIF earns 11% and pays an effective 15% long-term capital gains tax including surcharge and cess, the tax outgo is 1.65 percentage points, leaving a comparatively higher post-tax return of roughly 9.35%.
In effect, despite delivering 4 percentage points lower pre-tax returns, the SIF investor can end up with a superior post-tax outcome. This arithmetic has become harder for wealthy investors to ignore, as they increasingly evaluate products on a post-tax basis.
“Investors are shifting out of an AIF and into an SIF since the first SIF was launched. It has already started,” said Pai.
Tata AMC is not the first to shut down its AIF due to the prevailing taxation structure. KKR-backed Avendus Capital wrapped up its Absolute Return and Enhanced Return funds as the strategy failed to generate scale due to taxation and regulatory reasons.
The strategies introduced in SIFs are also similar to those available in a Category III AIF.
“I think SIF in that sense is a category which is a very, very direct competition for AIFs because the categories of SIF compete very closely with what Category III AIFs are currently doing,” said Nikhil Ranka, chief investment officer- equity alternatives at Nuvama AMC.
SIFs can be launched in equity, hybrid and debt categories with the advantage of using the long-short strategy. A Category III AIF can launch a long-only fund, similar to a large-cap mutual fund, and a long-short fund.
The hybrid long-short SIF, which has seen the most traction in the segment, starkly resembles an absolute return fund in AIFs. Hybrid long-short funds balance equity and debt while allowing some short exposure. On the other hand, an absolute return AIF aims to generate consistent, absolute gains using complex strategies, including hedging, short selling, and derivatives.
“SIFs will definitely see more participation in the days to come as product acceptance increases and people become more familiar with it,” said Ranka.
Catch all the Business News , Market News , Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
Download the Mint app and read premium stories
AI Description
Tata AMC has exited the Category III AIF space due to unfavorable taxation and competition from specialized investment funds. This decision reflects broader challenges in the Indian alternative investment landscape.