Most investors, when evaluating a fund, ask about returns, past performance, market outlook, the fund management team, and their experience. These are necessary questions, but they are table stakes. Beyond these basics, there are sharper questions — ones that reveal process discipline, alignment of interest, and the real structure of your investment that rarely get asked, yet have a direct bearing on the decisions that affect your capital.
This piece is about understanding exactly what you are getting into before you sign.
A. Process & Discipline
- What is the portfolio concentration policy, how many stocks or companies, and what is the maximum single-stock exposure?
This is specific and answerable. It tells you whether the manager has a defined risk framework or is making discretionary calls without guardrails. Concentration limits directly impact how much a single bad bet can damage your portfolio.
- What is the average holding period across your portfolio?
This tells you whether you are investing with a genuinely long-term manager or a trader dressed as a fund manager. Holding period is one of the most honest signals of investment philosophy — far more than what is written in the fund documents.
- What is your process for adding a new investment? Who is involved in the decision, and how long does it typically take from idea to deployment?
This reveals whether the fund runs on institutional process or individual conviction alone. A one-person decision structure is not inherently wrong, but you should know what you are getting into. The answer also indicates how reactive or deliberate the manager is in deploying your capital.
- Have you ever had a complete write-off in your portfolio, and if yes, what happened?
This is the most honest version of any risk discipline question. Every manager who has been through real market cycles will have a difficult investment to speak to. How they answer — with clarity and ownership, or with deflection tells you more about their judgment than any performance chart.
B. Fees, Expenses & the Fine Print
This is where most HNIs leave significant money on the table, not because they are uninformed, but because they do not ask specifically enough.
Beyond the headline management fee and performance fees, ask about: setup fees, fund operating expenses (audit, legal, custodian, registrar), transaction costs, and whether these are charged to the fund corpus or separately. In an AIF, operating expenses charged to the fund directly reduce your NAV. Ask for a line-by-line breakdown before committing.
- What is your hurdle rate, and how exactly is carry calculated?
Performance fees (carry) sound straightforward until you read the details. Is carry calculated on absolute returns or returns above the hurdle? Is it on individual investment exits or blended across the portfolio? Is there a high watermark? Understanding this changes how you evaluate the manager’s actual incentive structure.
- On what date is NAV allocated when I subscribe, and on what date when I redeem?
This is a question almost nobody asks, and it matters enormously. In many AIFs, the subscription NAV is not the date your cheque clears — it may be days or weeks later, after your funds are deployed. Similarly, exit NAV lock-in and actual fund receipt can have a significant lag. Understand the exact timelines.
- If there is a drawdown structure, what happens to my undeployed capital in the interim?
Category II AIFs often draw capital in tranches as opportunities arise. Between your commitment and deployment, your capital typically sits in liquid instruments. Ask: where exactly does it sit, what return does it earn, and who monitors that? Idle capital drag is real and largely invisible in headline return numbers.
C. Alignment & Conflict of Interest
SEBI requires a minimum sponsor contribution to every AIF which is a regulatory baseline, not a conviction signal. The real question is whether the fund manager has personally invested in the fund beyond that requirement. When the person making daily portfolio decisions has their own money at stake, incentives align differently. Ask for the quantum, and ask specifically whether it is the manager’s personal capital or the sponsor entity’s mandated contribution.
- Do you co-invest in the same companies through any other vehicle, and if so, how is allocation managed?
This is a conflict-of-interest question that institutional investors always ask, but HNIs rarely do. If the same fund manager runs multiple strategies or vehicles, there should be a documented allocation policy that ensures you are not last in line for the best opportunities.
- For unlisted or pre-IPO holdings, who is the independent valuer and how often are valuations reviewed?
NAV in a fund with private holdings is only as credible as its valuation methodology. Ask: is the valuer truly independent? What method is used (DCF, comparable transactions, last round of funding), and how often is it reviewed? This is especially relevant in Category I and II AIFs with significant unlisted exposure.
D. Fund Structure & Risk
- What is the fund tenure, and has it ever been extended? What is the policy if it needs to be extended?
AIFs have defined tenures, but extensions happen. Ask whether the fund has sought extensions before, under what circumstances, and what the approval process looks like. A manager who has managed through a fund lifecycle will have clear answers. One who has not may underestimate how complex a wind-down can be.
- Who are the fund’s intermediaries — trustee, custodian, auditor, legal advisor, tax advisor, and RTA?
The names behind a fund matter more than most investors realise. The trustee oversees investor protection and compliance oversight. The custodian holds and safeguards assets. The auditor’s credibility directly impacts the reliability of financial statements. The RTA manages unit allotment, redemption processing, and investor records. A slow or poorly equipped RTA is one of the most common causes of operational delays that investors experience. Legal and tax advisors shape how the fund is structured and how efficiently it responds to regulatory changes. A fund backed by reputed, experienced intermediaries run faster, cleaner, and with fewer surprises.
- What is your gating policy on redemptions?
In periods of market stress, some funds restrict redemptions to protect remaining investors. Ask: Is there a gating clause in your trust deed? Under what conditions does it apply, and has it ever been triggered? You are entitled to understand your liquidity rights.
- Does my cheque size actually suit this fund’s strategy?
Not every fund is built to efficiently handle every allocation size. A small fund with a tight liquidity profile may struggle to build or exit positions if it takes in very large cheques relative to its corpus. Conversely, a very small ticket in a large fund may not get the manager’s attention. Ask honestly: Is this the right fit for both sides?
- What is your key person policy — what happens if the lead manager exits the fund mid-tenure?
Most AIF trust deeds include a key person clause that defines who the identified decision-makers are. If a key person exits, it typically triggers an investor notice period during which LPs can choose to redeem or continue. In some structures, new investments are paused until a replacement is approved. Ask what is specifically written in the trust deed, whether the broader team has enough depth to continue managing the portfolio, and what the historical continuity of the core team looks like. A stable team with low attrition is itself an answer to this question.
The Bigger Point
Exceptional investment outcomes do not come from picking the best performing fund in a rear-view mirror. They come from selecting managers with genuine process discipline, clear incentive alignment, and the intellectual honesty to answer uncomfortable questions directly.
The questions above are not adversarial. They are the mark of a sophisticated investor who understands that the fine print, the fee structure, the valuation methodology, and the alignment of interests matter as much as the return potential.
Ask them. Every single one.
The HNI Brief is a weekly series by Kresha Gupta, Director & Fund Manager, Steptrade Capital.
Views are educational in nature and do not constitute investment advice.
