How an AIF Fund Is Structured Internally: Sponsor, Trustee, Manager & Investor Rights Explained

People often call Alternative Investment Funds (AIF Funds) complicated, unclear, or just for experienced investors. The way an AIF Fund is set up is layered on purpose. It’s not to confuse people, but to create a balance between being flexible, having good control, and making returns while still being responsible.

This blog breaks down the internal structure of an AIF Fund step by step, explaining who does what, why each role exists, and how investor rights are protected, based on India’s current regulatory and governance framework.

Step 1: What Is an AIF Fund and Why Does Structure Matter?

An AIF Fund is a private investment pool regulated by SEBI under the AIF Regulations of 2012. It gathers funds from investors and puts them into alternative assets like private equity, venture capital, private credit, real estate, infrastructure, or hedge fund strategies.

Unlike mutual funds, an AIF Fund is custom-built. Its structure determines:

• Who controls investment decisions
• Who oversees compliance
• How investors are protected
• How conflicts are managed

That’s why SEBI mandates a clear separation of roles inside every AIF Fund.

Step 2: Who Sets Up the AIF Fund and Takes the First Risk? (The Sponsor)

The Sponsor is the starting point of an AIF Fund.

What does the Sponsor do?

• Conceptualises and sets up the AIF Fund
• Defines the investment strategy and fund category
• Appoints the Manager and governance framework
• Contributes capital to the fund (mandatory skin in the game)

SEBI requires Sponsors to maintain a continuing interest in the AIF Fund — ensuring alignment with investors.

Why the Sponsor role matters

The Sponsor isn’t just a name on paper. Their capital commitment and reputation act as:

• A credibility signal to investors
• A governance anchor for the fund
• A long-term accountability mechanism

In simple terms: if the fund fails, the Sponsor feels it too.

Step 3: Who Protects Investors at the Governance Level? (Trustee / Board / Designated Partners)

Depending on the legal form of the AIF Fund, governance oversight is handled by different entities:

This body exists solely to protect investor interests.

What does this oversight body do?

• Ensures the fund operates as per its PPM
• Monitors the Manager’s compliance and conduct
• Reviews compliance reports and audits
• Approves major governance actions where required

They do not make investment decisions — they ensure the decisions are made within rules.

Why this layer exists

This separation prevents excessive concentration of power with the Manager and provides investors with:

• An independent governance checkpoint
• Regulatory oversight beyond internal controls

Step 4: Who Actually Runs the AIF Fund Day to Day? (The Manager)

The Manager is the operational engine of the AIF Fund.

Core responsibilities of the Manager

• Making investment and exit decisions
• Managing portfolio risk and allocation
• Implementing compliance and internal policies
• Reporting to investors and regulators

The Manager acts in a fiduciary capacity, meaning they are legally obligated to act in investors’ best interests.

Who supports the Manager internally?

Together, this ensures that investment skill is balanced with discipline.

Step 5: How Are Conflicts and Risks Controlled Inside an AIF Fund?

SEBI requires every AIF Fund to maintain written internal policies covering:

• Conflict of interest management
• Risk management frameworks
• Valuation methodology
• Insider trading and ethical conduct
• Investor grievance redressal

Why this matters

AIFs invest in illiquid and complex assets. These policies:

• Prevent misuse of information
• Ensure fair valuation of portfolios
• Protect minority investors
• Create audit trails for accountability

Governance here is preventive, not reactive.

Step 6: What Rights Do Investors Actually Have in an AIF?

A common myth is that AIF investors have “no control.” The reality is more nuanced.

Investor rights fall into three buckets

1. Disclosure Rights

Investors are entitled to:

• The Private Placement Memorandum (PPM)
• Periodic portfolio and financial reporting
• Event-based disclosures (material risks, team changes, regulatory issues)

2. Voting Rights on Key Decisions

Certain actions cannot be taken without investor approval:

This ensures no unilateral changes to the fund’s DNA.

3. Grievance Redressal

Managers must resolve complaints within defined timelines and are accountable via SEBI’s SCORES system.

Step 7: What Changes Under the Accredited Investors-Only AIF Framework?

SEBI introduced the Accredited Investors (AI)-only AIF framework to recognise sophisticated investors.

What changes in AI-only AIF Funds?

• Greater flexibility in disclosures
• Ability to structure side letters with differential rights
• Potential consolidation of trustee and manager roles
• Customised commercial terms

What does NOT change

• Fiduciary duty of the Manager
• Investor consent on material matters
• Core governance principles

In essence, regulation adapts to investor sophistication — not the other way around.

Step 8: How Does This Structure Balance Speed and Safety?

The internal structure of an AIF Fund works because:

• Sponsors align incentives
• Managers execute strategy
• Trustees oversee conduct
• Investors retain veto rights on critical decisions

This allows AIF Funds to:

• Move faster than public markets
• Invest in complex opportunities
• Remain accountable and transparent

Governance here isn’t bureaucracy — it’s risk engineering.

Final Perspective: Why Understanding AIF Fund Structure Matters

An AIF Fund is not a black box. It is a deliberately engineered system where each participant has defined authority, responsibility, and accountability.

For investors, understanding this structure means:

• Better due diligence
• Clear expectations on control and rights
• Informed evaluation of risk and governance quality

At AltPort Funds, we believe strong returns start with strong structures. Because in alternative investments, how a fund is built often matters as much as where it invests.