AIF Fees Explained With a ₹1 Crore Example

A '2 and 20' description — a 2% annual management fee and 20% carried interest — is a useful shorthand but a genuinely incomplete picture of what an AIF investor actually pays. The investor needs to know precisely what the 2% is charged on, for how long, which expenses sit outside that fee entirely, whether the hurdle rate is a 'preferred return' or a 'hard hurdle', and exactly how the catch-up mechanism and carry calculation operate together.

Small drafting differences between funds that both describe themselves as '2 and 20' can produce materially different net outcomes for the investor — the words are standardised, but the mechanics behind them frequently are not.

The management fee may be charged on total committed capital, on invested (drawn-down) capital only, or on a base that steps down after the investment period ends — a fund charging 2% on the full ₹1 crore commitment for 10 years costs meaningfully more than one charging 2% on invested capital that steps down to 1% after year five.

Carried interest is the manager's share of eligible profits, but only after the contractual waterfall is satisfied — typically: return of capital to investors first, then a preferred return (commonly 8% per year) to investors, then a 'catch-up' phase where the manager receives a larger share until they have caught up to their full 20% of total profit above the return of capital, and only then a straight 80/20 split on remaining profit.

Fund expenses — legal, audit, administration, and 'broken deal' costs from due diligence on transactions that were never completed — and any applicable taxes typically sit outside the management fee entirely and are usually charged to the fund, reducing what investors ultimately receive.

A 20% carry does not always mean the manager receives 20% of total fund profit in every scenario — the catch-up mechanism, if structured generously to the manager, can mean they receive a disproportionately larger share of profits in the tier immediately above the hurdle before settling into the standard 80/20 split.

IRR-based hurdles behave quite differently from simple-return-multiple thresholds, because IRR rewards faster returns of capital — a fund that returns capital quickly can clear an IRR-based hurdle more easily than one holding investments longer, even if the total profit is identical.

Gross target returns quoted in a pitch deck can obscure the investor's actual net cash result once management fees, carry, fund expenses and any applicable taxes are all applied in sequence — always ask the manager to walk through a worked net example, not just state a gross target.

Before acting, answer five questions in writing: request a fully worked waterfall example for a ₹1 crore commitment, showing every fee, expense and carry step explicitly; check the exact fee base and any contractual step-down dates; list every expense category that sits outside the stated management fee; confirm whether clawback provisions exist (requiring the manager to return excess carry if later losses reduce overall fund profit) and whether an escrow mechanism secures that clawback; and model low, base and high investment-performance scenarios to see how the net result changes across all three.

Never approve a fee structure you cannot personally reproduce with a calculator and the actual legal wording in front of you — if the manager or their team cannot walk you through the exact mechanics clearly, that itself is useful information about the relationship you are entering.