New Delhi, March 18 -- India's alternative investment funds (AIFs) are increasingly launching fund of funds (FoF) to work around the market regulator's cap on the number of investors, which aims to prevent them from becoming too large and resembling mass retail products like mutual funds.

According to the Securities and Exchange Board of India (Sebi), no scheme of an AIF can have more than 1,000 investors, with an exception for angel funds. The cap has become more relevant as the industry grows rapidly and funds draw interest from a widening pool of high-net-worth individuals, family offices and global investors.

By placing investors in a FoF that then allocates capital across underlying AIFs, managers can effectively broaden participat...