An investor in an open-ended Category III AIF asks to take some money off the table. It sounds like a routine operations instruction: process the redemption, pay out at the applicable NAV, update the register. But SEBI's framework treats the minimum investment amount as a continuing condition, not just an entry test. If a partial redemption would leave the investor below the minimum, it cannot be processed as requested. This article explains the rule, why it exists, how to apply it in common situations, and the controls a manager should have in place.
In an open-ended AIF, an investor may make a partial redemption only if the investment retained after redemption is not less than the minimum investment amount, which is generally ₹1 crore (₹25 lakh for employees or directors of the AIF, manager or sponsor). If the remainder would fall below the minimum, the investor can redeem a smaller amount or exit fully. Accredited investors are exempt from the minimum investment requirement.
What the rule says about partial redemptions
Regulation 10(c) of the SEBI (Alternative Investment Funds) Regulations, 2012 sets the minimum investment that an AIF may accept from an investor: ₹1 crore generally, and ₹25 lakh for investors who are employees or directors of the AIF or of its manager or sponsor. A proviso exempts accredited investors from the minimum investment requirement.
For open-ended AIFs, the Master Circular for AIFs adds two linked conditions. The first lump-sum investment received from an investor must not be less than the minimum investment amount. And where an investor partially redeems units, the amount of investment retained by the investor must not be less than the minimum investment amount. These conditions continue in the consolidated Master Circular dated 3 June 2026.
A partial redemption is permitted only if the investment that remains after redemption still meets the minimum. If it would not, the request must be modified to a smaller amount or converted into a full redemption.
Which AIFs and investors does this affect?
The rule matters mainly for Category III AIFs, because Category I and Category II AIFs must be close-ended. Category III schemes can be open-ended and offer periodic redemptions, typically monthly or quarterly at NAV, as set out in the PPM.
| Investor type | Minimum investment | Effect on partial redemption |
|---|---|---|
| General investor | ₹1 crore | Retained investment must stay at or above ₹1 crore |
| Employee or director of the AIF, manager or sponsor | ₹25 lakh | Retained investment must stay at or above ₹25 lakh |
| Accredited investor | Not applicable | Minimum investment condition does not apply; PPM terms still govern |
| Joint investors (spouse, parent or child) | ₹1 crore for the joint holding | Joint holding is tested as one investment |
Units issued to employees purely as profit-sharing, rather than against capital contribution, follow a separate rule. See our note on units to employees and the minimum investment.
Why the minimum investment is a continuing condition
The minimum investment is the main gatekeeping tool that keeps AIFs restricted to investors who can bear the risk of complex, less liquid strategies. If an investor could enter at ₹1 crore and then redeem down to a few lakh, the threshold would become a formality and the open-ended structure would start to resemble a retail product.
- It keeps AIFs restricted to financially capable investors throughout the scheme life, not just at entry.
- It prevents the gradual dilution of ticket sizes through staggered redemptions.
- It stops open-ended liquidity from being used to turn an AIF into a retail-style product.
- It keeps the regulatory perimeter between AIFs and mutual funds intact.
Worked examples of partial redemption requests
Request within limits. An individual invested ₹1.5 crore in an open-ended Category III scheme. The holding is now valued at ₹2.4 crore. The investor asks to redeem ₹1.2 crore. The retained investment would be ₹1.2 crore, which is above ₹1 crore, so the request can be processed.
Request that breaches the minimum. Same investor, but the holding is now valued at ₹1.8 crore and the investor asks to redeem ₹1 crore. The retained investment would be ₹0.8 crore, below ₹1 crore. The manager can offer a redemption of up to ₹0.8 crore, leaving ₹1 crore invested, or a full redemption of ₹1.8 crore.
Market fall before the redemption date. An investor requests ₹40 lakh when the holding is ₹1.45 crore, leaving ₹1.05 crore. By the redemption date, NAV has fallen and the holding is ₹1.35 crore. Processing ₹40 lakh would now leave ₹95 lakh. The test should be applied at the NAV used for the redemption, not the NAV when the request was received.
The PPM should state clearly how the retained investment is measured, for example at the NAV applicable on the redemption date, and how requests that would breach the minimum will be handled. That avoids disputes when markets move between request and processing.
Situations where breaches commonly arise
Controls AIF managers should have in place
- Write the rule into the PPM and application form. State that partial redemptions are subject to the retained minimum and explain the measurement basis.
- Build a system check. Configure the RTA or fund administration system to flag any request that would leave the investor below the applicable minimum.
- Test at the redemption NAV. Re-run the check on the NAV actually used for processing, not just at the time of the request.
- Tag investor category. Record whether the investor is general, employee or director, or accredited, and track the validity of accreditation certificates.
- Communicate early. Tell investors in advance when a request cannot be processed in full, and offer the permissible options.
- Log exceptions. Record rejected or modified requests and the reason, as evidence for the Compliance Test Report and PPM audit.
A redemption processed in breach of the minimum is a compliance failure that may need to be reported and remedied. Our article on the AIF Compliance Test Report explains how such breaches are surfaced to trustees and sponsors.
Frequently asked questions
Can an investor partially redeem units of an open-ended AIF?
Yes, if the PPM permits redemptions and the investment retained after redemption is not less than the minimum investment amount applicable to that investor.
What is the minimum investment in an AIF?
Generally ₹1 crore per investor, and ₹25 lakh for employees or directors of the AIF, its manager or sponsor. Accredited investors are exempt from the minimum, and some fund types such as angel funds and special situation funds have their own thresholds.
What happens if a partial redemption would take the holding below ₹1 crore?
The request cannot be processed as made. The investor can redeem a smaller amount that keeps the retained investment at or above the minimum, or redeem the entire holding.
Does this rule apply to Category I and II AIFs?
Category I and II AIFs must be close-ended, so they do not offer investor-initiated redemptions in the same way. The issue arises mainly in open-ended Category III schemes.
Is a full redemption always allowed?
A full exit does not leave a residual holding below the minimum, so the minimum investment condition is not an obstacle. The PPM's redemption terms, notice periods and any exit loads still apply.
Conclusion
Open-ended AIFs offer liquidity, but within a perimeter. The minimum investment amount follows the investor through the life of the scheme, and every partial redemption must be tested against it at the NAV actually used. Managers who build this check into their systems, PPM and investor communication avoid both regulatory breaches and awkward conversations with investors whose requests have to be scaled back.
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Talk to usThis article is for general information only and does not constitute professional advice or solicitation. Examples are illustrative. The measurement basis for the retained investment should be confirmed against the scheme's PPM and the current Master Circular. Provisions are summarised as of October 2026. Please refer to the relevant provisions and seek advice on your specific facts.