But are AIFs truly “safer” for pension money, or do they still carry risks that retirees cannot afford? Market experts say the answer lies somewhere in between.
Not ‘Safe’, But More Structured Than Speculative Bets
Experts caution against viewing Category
I and II AIFs as safe instruments in the traditional pension sense. While these funds are more organised than high-risk speculative products—mainly because they avoid leverage and focus on long-term assets—risk is far from eliminated.
Industry professionals point out that AIFs come with long lock-in periods, limited liquidity and valuations that are not visible or priced daily like listed equities or bonds. Performance is also heavily dependent on the fund manager’s skill and strategy.
“AIFs should never be the core holding of a pension portfolio,” an expert explained, adding that at best, they can play a small, carefully managed role alongside traditional assets.
Liquidity Risk Is The Real Concern For Pensions
Past experience offers a clear warning. A few years ago, several credit-focused AIFs appeared stable, backed by strong sponsors and attractive yields. However, when liquidity conditions tightened, exits became difficult. Capital was not lost overnight, but it remained stuck much longer than investors had planned.
For pension funds, this kind of uncertainty matters more than short-term volatility. Retirement systems need predictable cash flows, and prolonged lock-ins can disrupt long-term planning.
Can AIFs Help NPS Beat Inflation Over The Long Term?
Over a 20–30 year horizon, experts agree that limited AIF exposure can help improve inflation-adjusted returns. Some AIF strategies benefit from long-term growth themes and illiquidity premiums, which can deliver returns above inflation.
However, this works only if exposure is strictly capped and fund selection is highly disciplined. AIFs are meant to complement equity and debt—not replace them. Once they start forming a meaningful share of pension assets, the overall risk profile changes sharply.
In the context of NPS, experts stress that AIFs should sit at the fringes of the portfolio, enhancing returns without altering the system’s core risk framework.
Alternatives As A Growth Engine If Guardrails Are In Place
Phanisekhar Ponangi, CEO of MavenArk Asset Managers, highlights that globally, alternative investments have played a key role in funding private enterprises, infrastructure and innovation-led growth.
According to him, pension funds—given their long-term, stable capital—are well placed to explore alternatives such as private credit, infrastructure and venture capital. These segments can offer higher, inflation-beating returns over time compared with crowded public markets.
That said, the key risks remain unconventional cash flows, valuation complexity and illiquidity. To manage this, regulators have placed guardrails, including caps on how much pension money can be allocated to qualifying Category I and II AIFs, especially in infrastructure and venture funds.
