Over the last decade, Indian equities have sharply outpaced broader emerging markets—not just in sentiment, but in hard numbers. As of mid-2025, the iShares India 50 ETF has outperformed the broader iShares Core MSCI Emerging Markets ETF across most key timeframes, barring the recent 1-year period (see Figure 1), reflecting India’s reform-driven growth, resilient domestic demand driving up valuations and attracting sustained foreign inflows.

Figure 1: Average Annual Return (%) of MSCI EM index vs iShares India 50 ETF as on 30th June 25.

Source: https://www.ishares.com/us/products/239758/

India’s weight in the MSCI Emerging Markets (EM) Index has surged from ~4% in 2008 to over 18% in 2025¹ - overtaking Brazil, Russia, and South Africa, and even briefly surpassing China during a phase of underperformance in early 2024.

But with earnings growth moderating and valuations stretched, is the premium still justified?

Earnings vs valuations? 

The divergence between market valuations and earnings fundamentals has become increasingly apparent. EPS growth across large-cap indices is decelerating, with key sectors like IT services, consumer discretionary, and pharma witnessing mid-single-digit revenue expansion. Meanwhile, valuations remain elevated—the Nifty 500’s median P/E has averaged 23.8x over three years and still hovers near 25x as of July 2025.

Between July 2022 and July 2025, the Nifty 50 rose at a CAGR of 11.95%, while earnings grew just 8.24%—highlighting that price expansion has outpaced profit growth. This divergence underscores the market’s reliance on sentiment over fundamentals. Corporate margins, which had benefited from post-COVID cost savings and pricing power, are now plateauing amid rising input costs and weak consumption revival.

Nifty 50 vs EPS growth: A clear divergence

Figure 2: Nifty 50 growth (11.95%) outpacing EPS growth (8.24%) since July 2022.

Source: https://www.screener.in/company/NIFTY/

Global signals: Inverted yield curve, high real yields, sticky inflation

Outside India, global signals point to increasing risk aversion. The inverted US yield curve—where the 3-month Treasury yield exceeds the 10-year—has persisted for most of 2023–2025. Simultaneously, 10-year US TIPS yield now exceeds 2%, a dramatic shift from the near-zero era of the 2010s. This surge in real rates reduces the relative appeal of richly valued equities.

Figure 3: Yield spread of 3-months treasury constant maturity and 10-year treasury constant maturity

Source: https://fred.stlouisfed.org/series/T10Y3M

Against this tightening global backdrop coupled with Indian equities becoming increasingly expensive, HNIs and UHNIs are increasingly seeking uncorrelated return streams—particularly in markets with macro resilience and structural alpha.

Enter India’s alternatives: From US$400 billion to US$2 trillion

As public market valuations stretch and traditional debt instruments struggle to offer real returns, investors are increasingly reallocating toward India’s growing alternatives ecosystem. The total alternative assets under management in India are estimated at US$400 billion (approximately 33 lakh crore). This includes US$156 billion in SEBI-registered AIFs and rest from broader pools such as offshore vehicles, family offices, and unlisted structures. The market is projected to grow five-fold to over US$2 trillion (165 lakh crore) by 2034, driven by rising HNI participation, policy support, and demand for uncorrelated, higher-yielding assets.² Reflecting this momentum, Alternative Investment Fund (AIF) commitments have surged at a CAGR of ~31% over the past five years, accounting for approx 20% of MF AUM as of March 2025—far outpacing the mutual fund industry’s 24% growth during the same period.

Within the AIF universe, Category II AIFs—which include private equity, real estate, and private credit account for around 10.3 lakh crore (~US$120 billion), while Category III (hedge and complex trading) funds represent approximately 2.29 lakh crore (~US$27 billion).

Over the past five years, several alternative asset classes have outpaced traditional mutual funds (approx. 12% as per AMFI) and public equities in terms of returns and resilience.³

• Private equity and venture capital funds, particularly generalist VC strategies in India, have consistently delivered IRRs of 20–25%. 
• Private credit strategies, structured as Category II AIFs, typically yield 12%–15% (gross, pre tax and fees) annually, in INR terms; with strong performance driven by mezzanine deals, special situations, and mid-market lending.
• Meanwhile, listed REITs and InvITs with stable income streams and tax-efficient structures are delivering dividend yields exceeding 6%, with select vehicles offering up to 14.6%.

However, the rise of alternatives has been led by two key instruments—market-neutral hedge funds and private credit—offering steady returns with low correlation to market volatility.

A closer look: India’s hedge funds and absolute return strategies

Globally, hedge fund assets surpassed US$4.1 trillion in 2024 and are projected to cross US$5.5–US$6.3 trillion by 2030.⁴ Within this universe, absolute return and market-neutral strategies account for 15–20%, underscoring their role in managing volatility and delivering uncorrelated alpha in institutional portfolios.

In India, the absolute return space—primarily under Category III AIFs—remains small but is gaining traction. As of March 2025, the AUM under absolute return strategies is estimated at 15,000–20,000 crore (US$1.8 Bn - US$2.5 Bn),⁵ with growing participation from UHNIs and family offices. These strategies typically deliver returns in the range of 9–12%, bridging the gap between traditional fixed income and equity.

To understand the direction of this space, we spoke to Prashant Kothari, Portfolio Manager at India Alternatives, based in Singapore. He believes India continues to offer compelling long-term equity potential, backed by structural domestic demand and a deepening capital market ecosystem. However, he cautions that current valuations are “being driven more by abundant liquidity than by fundamental GDP or earnings growth,” raising the need for portfolio insulation. Investors seeking resilience amidst potential market volatility, should consider diversifying into alternatives—including market-neutral strategies, gold, and silver—for better downside protection. India Alternatives also run a similar strategy, the Alpha Equity Absolute Return (EQAR) fund, which has delivered equity-like returns while maintaining a market-neutral profile. Its Sharpe ratio exceeding 3 underscores its ability to produce superior risk-adjusted returns, irrespective of broader market movements. These funds typically pursue arbitrage across sectors, long-short pairings, volatility spreads, and factor tilts to generate consistent alpha with minimal drawdowns.

Market-neutral funds are now evolving into multi-asset absolute return strategies, combining structured fixed income, tactical long-short equity, and even allocations to digital assets or REITs. However, taxation continues to be a bottleneck—Category III AIFs are currently taxed at the highest marginal slab, diminishing net post-tax returns. This makes offshore fund structures or IFSC-based wrappers (like in GIFT City) increasingly attractive for global allocators seeking India exposure.

Private credit in India: From US$25 billion to US$70 billion

Private credit is fast emerging as one of the most powerful stories in India’s alternative investment landscape. Once viewed as a niche corner of the market, it now stands at an estimated US$25 billion in assets under management (AUM) in 2024, with credible projections suggesting this could scale to US$70 billion by 2028. This dramatic growth is underpinned by rising demand from HNIs and family offices, deepening credit disintermediation, and regulatory tailwinds that have brought private lending into sharper focus.

Figure 4: Private credit AUM India as % of GDP*

Source: Praxis. 
*GDP refers to nominal GDP
Private credit has seen marquee deals over FY24–25, led by the record US$3.4 billion refinancing of Shapoorji. Other major transactions include a US$750 million deal for Mumbai International Airport and additional deals worth ~US$1.7 billion.

We spoke to Shyamal Karmakar, CEO of RV Capital India, one of the largest private credit fund managers in Asia. Karmakar believes that India’s private credit space is entering a breakout phase, supported by strong structural and regulatory tailwinds. According to Karmakar, the segment is being reshaped by growing demand from both resident and NRI HNIs seeking 4–5% alpha over traditional fixed income. He highlights that this surge has been catalysed by:

1. The rationalisation of debt taxation between AIFs and mutual funds (April 2023), combined with.
2. Macro stability, declining NPAs (from 14.5% in 2018 to 2.3% in 2025), and.
3. Improved resolution frameworks under the Insolvency and Bankruptcy Code (IBC).

For Karmakar, private credit’s appeal lies not just in yields. Performing private credit (PC) funds in India deliver gross returns in the range of ~14%–18%, often matching or exceeding Nifty-50 returns. Incidentally, RV Capital’s own India Credit Plus Fund is currently delivering a gross return (pre fees and taxes) of ~20.9% and net IRR of ~17.6%. 

Conclusion: From beta to alpha, India’s alternatives are ready

As global markets wobble under macro uncertainty and India’s public equity valuations hover at highs, the next wave of alpha is likely to come from alternatives. Whether through market-neutral strategies or private credit, India’s alternative investment landscape is growing not just in size, but in sophistication.

With robust governance, deepening fund manager expertise, and a hungry investor base, the India alternatives story is no longer a subplot; it’s becoming the main act.

1 MSCI

2 Avendus Capital’s India Goes Alternatives report

3 Industry interactions

4 Preqin and With Intelligence

5 Eleveight Research

Disclaimer: This article has not been reviewed by the Monetary Authority of Singapore.
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