Pension Fund Investments in SEBI-Regulated AIFs

On December 10, 2025, the Pension Fund Regulatory and Development Authority (PFRDA) issued the following two master circulars outlining investment guidelines for pension funds under the National Pension System (NPS):

• The first, “Master Circular on Investment Guidelines – GS” (Government Sector) (GS Circular), applies to schemes like Central/State Government default, Corporate CG, NPS Lite, Atal Pension Yojana (APY), and related funds; and
• The second, “Master Circular on NPS Investment Guidelines – NGS” (Non-Government Sector) (NGS Circular), covers NPS Tier I and Tier II for private sector subscribers.

These guidelines introduce structured provisions for investments in SEBI-regulated Alternative Investment Funds (AIFs), aiming to enable diversification while imposing strict limits and safeguards to protect subscriber interests.

The two Master Circulars mentioned above define permissible asset classes (or categories) for pension funds under the NPS, with specific limits as a percentage of Assets Under Management (AUM), sub-categories, instruments, ratings, and safeguards.

In the GS Circular, Category V (formally titled “Asset Backed, Trust Structured and Miscellaneous Investments“) serves as one of the broad investment categories (or asset classes) under which pension funds in the government sector can allocate a portion of their AUM. The overall exposure to this entire category is capped at up to 5% (five percent) of the scheme’s AUM, reflecting a conservative approach to higher-risk or alternative assets.

Within Category V, permissible instruments include several sub-categories, with AIFs falling under sub-category (e). For AIFs specifically under Category V in the GS circular, there is a tighter sub-limit: aggregate investment in such AIFs shall not exceed 1% of the respective scheme’s AUM managed by the pension fund.

The NGS Circular permits investments by private sector pension funds in debt-oriented AIFs (Category I and II, with similar sub-focus on startups, infrastructure, etc.) under asset Class C (Corporate Debt Securities). A private sector pension fund’s aggregate exposure to units of Infrastructure Investment Trusts (InvITs), debt-oriented AIFs, and Basel III Tier I bonds is limited to 5% of AUM under Asset Class C. Unlike the GS Circular which has a 1% sub-limit for investments in AIFs, the NGS Circular does not prescribe any additional standalone AIF cap beyond the aforementioned aggregate limit of 5%. The NGS Circular prescribes a 15% cap for investments per NIC Level-5 industry, which is not present in the GS Circular.

Under the GS Circular and the NGS Circular, pension funds can invest in an AIF only if:

• The AIF has a minimum corpus of INR 100 crore;
• The pension fund’s exposure to a single AIF cannot exceed 10% of the AIF’s corpus; And
• The AIF should have a minimum ‘AA’ or equivalent rating from at least two SEBI-registered agencies.

Section 25 of PFRDA Act, 2013 prohibits pension funds (both public and private sector) from investing outside India, directly or indirectly. SEBI’s Master Circular for AIFs allows AIFs to excuse or exclude investors from an investment proposed to be made by the AIF on various grounds, one of which is that the investor, based on the opinion of a legal professional/legal advisor, confirms that its participation in the investment opportunity would be in violation of an applicable law or regulation.  Therefore, a pension fund can invest in an AIF only if the AIF undertakes to not invest in overseas securities at all or agrees to exclude the pension fund from all its overseas investments.

Pension funds must perform rigorous due diligence and risk assessments to ensure that their investments are compliant with the PFRDA Act, 2013 and all relevant regulations thereunder.

Indian government sector pension funds could invest up to ₹85,000 crore in eligible AIFs if the entire 1% allocation were utilised^[1]. However, despite this regulatory allowance, pension fund participation in AIFs has historically been minimal. This reluctance can largely be attributed to several structural factors, including:

• the preference of pension fund managers for highly liquid and rated instruments;
• additional regulatory conditions, such as minimum fund corpus thresholds and other investment restrictions, which limit the pool of eligible AIFs; and
• concerns relating to governance, risk monitoring and valuation transparency in alternative investment structures.

[1] The IVCA–360 ONE–CRISIL Report: Unlocking Domestic Capital: Key to India’s AIF Growth, 2025.

https://intelligence.crisil.com/en/homepage/what-we-think/all-our-thinking/reports/2025/12/unlocking-domestic-capital.html

Recently, Mr. S. Ramann, Chairperson of the PFRDA announced that, going forward, the NPS would be required to set aside 1% (one percent) of its total AUM for investments into AIFs.

Based on the current size of the NPS corpus, this step is expected to channel approximately ₹17,000 crore (about $1.8 billion) into the AIF ecosystem, which is significant given that none of the 10 portfolio managers for NPS had invested in AIFs until December 2025.^[1] The announcement forms part of the broader policy push to increase domestic institutional participation in India’s private capital markets, which have historically relied heavily on foreign institutional investors, sovereign funds and domestic high-net-worth individuals.

In order to operationalise the proposed 1% allocation to AIFs, several institutional measures are reportedly being introduced by the NPS Trust and the PFRDA, including the following:

• Setting up of a dedicated AIF Cell, which shall act as the nodal unit for undertaking standardised due diligence, post-investment monitoring, compliance tracking and reporting for AIF investments under NPS. The AIF Cell is expected to function within a robust governance framework involving both internal and external committees, while investment discretion and allocation decisions will continue to remain with the individual pension fund managers;
• Creation of a dedicated NPS fund-of-funds platform to route pension capital into selected AIFs. The objective of this structure is to establish a transparent and institutionalised selection framework, enabling pension funds to invest in AIFs with greater oversight, standardised evaluation criteria and enhanced accountability; and
• Clearer classification of all AIF instruments into equity and debt categories, which is expected to improve the ability of pension fund managers to integrate alternative investments into their broader portfolio allocation frameworks. This approach mirrors earlier regulatory developments where REITs and InvITs were classified as equity instruments, enabling institutional investors to allocate capital to such vehicles more efficiently.

[1] Ibid

The GS Circular can be found here.

The NGS Circular can be found here.

We hope you have found this information useful. For any queries/clarifications, please write to us at insights@elp-in.com  or write to our author:

Vinod Joseph, Partner – Email – vinodjoseph@elp-in.com

Saloni Khaitan, Associate – Email – salonikhaitan@elp-in.com