What is an AIF?
(Alternative Investment Fund — India’s advanced private capital vehicle)
At its core: An AIF is a privately pooled investment vehicle, established in India (as a trust, company, LLP, or body corporate), which collects capital from select qualified investors and invests it in accordance with a clearly defined investment strategy. It is regulated under SEBI’s AIF Regulations, 2012.
(Adheres to SEBI oversight — unlike an unregulated pool)
Why AIFs Matter: Unlocking the Alternative Edge
Key Features & Essentials
| Feature | Details & Implication |
|---|---|
| Investor class | Only “qualified / sophisticated” investors (HNIs, institutions, Accredited) — not retail public. |
| Minimum corpus & commitment | Funds must have a minimum capital Rs.1cr as prescribed by SEBI. |
| Lock-in, liquidity & structure | Both Open & closed-ended; Category 1 & 2 lock-in periods apply; redemption windows allowed Category 3. |
| Leverage & borrowing | Rules vary by category: some allow limited leverage; others permit more aggressive borrowing. |
| Exposure limits | To prevent concentration, limits exist on exposure to single investee, co-investment norms, etc. |
| Tax treatment | Category 1 and 2 Follows pass through structures; In category 3, taxation happens at the fund level. |
| Disclosure & governance | Mandatory offering documents, periodic reporting, valuation protocols, conflict of interest norms, etc. |
The Three Pillars: AIF Categories in India
SEBI classifies AIFs into Category I, II, III — each with distinct focus, constraints, risk/return dynamics, and suitability.
Investment Focus
- Early-stage ventures, startups, SMEs
- Infrastructure projects
- Social impact / development funds These are often sectors seen as beneficial from an economic or social perspective.
Attributes & Restrictions
- Cannot typically use leverage (except temporarily under limited conditions)
- Must invest “primarily” in unlisted securities
- Exposure / concentration limits (e.g. in one investee)
- Encouraged via regulatory incentives
Ideal For
Long-term oriented investors willing to accept illiquidity and high risk for potential outsized reward.
These funds often have among the longest gestation periods.
Investment Focus
- Private equity/growth capital for established companies
- Debt strategies (structured credit, mezzanine financing)
- Real estate or infrastructure beyond the early stage
- Other strategies not fitting Category I or III
Attributes & Restrictions
- Leverage disallowed (except limited temporary borrowing)
- No use of complex derivatives (unless for hedging within restricts)
- Concentration caps
- Strong disclosure, valuation norms
Ideal For
Investors seeking a balance – moderate to high returns, somewhat lower volatility than early-stage bets, and a clearer exit pathway.
Investment Focus
- Short-term trading strategies (long/short equity, arbitrage, derivatives)
- PIPE (Private Investments in Public Equity)
- Broad, dynamic strategies using leverage and derivative overlays
Attributes & Restrictions
- Leverage is permitted (subject to investor consent and SEBI limits)
- Can invest in both listed and unlisted, derivatives, structured products
- Higher complexity, higher risk
- Tax treatment differs (less or no pass-through benefit)
Ideal For
Sophisticated, risk-tolerant investors looking for alpha, tactical plays, and active strategies across market cycles.
How These Categories Differ (A Snapshot)
| Dimension | Category I | Category II | Category III |
|---|---|---|---|
| Leverage / Borrowing | Very restricted, only temporary | Disallowed (except limited operational borrowing) | Allowed (with appropriate disclosures and investor approval) |
| Investment tools | Primarily equity / debt in unlisted / infrastructure | Equity, debt in private / structured assets | Derivatives, shorting, listed & unlisted, structured products. |
| Liquidity | Low | Moderate | Higher (if open-ended) |
| Risk / Return Profile | High risk, high upside | Moderate-to-high | Volatile, high return potential |
| Tax Treatment | Generally pass-through (taxes on investor) | Generally pass-through | Fund-level taxation (capital gains, etc.) |
| Suitability | Long-term, patient capital | Balanced, growth + income | Tactical, active, nimble investors |
