Privately pooled vehicles registered with SEBI under Category I, II or III, for investors who meet the eligibility threshold.
An Alternative Investment Fund is a privately pooled vehicle registered with SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012. It raises money from a defined set of investors under a Private Placement Memorandum and deploys it according to a stated strategy. Unlike a mutual fund it is not offered to the public, is not required to publish a daily NAV, and is not open-ended.
The minimum commitment is Rs 1 crore per investor (Rs 25 lakh for directors, employees and fund managers of the AIF), and the scheme corpus must be at least Rs 20 crore. Capital is not paid upfront — it is called in tranches through a drawdown schedule as the manager finds deployments. We distribute AIFs where the investor is eligible, and we are plain about the trade-off: the strategies are genuinely different from anything a mutual fund can run, and so is the illiquidity.
Key features
- Three SEBI categories with distinct mandates, leverage rules and tax treatment
- Minimum commitment of Rs 1 crore per investor under SEBI AIF Regulations
- Capital called through a drawdown schedule rather than paid in full at the start
- Close-ended structures in Category I and II, with a stated tenure and extension terms
- Distribution waterfall, hurdle rate and catch-up defined in the fund documents
- Limited or no liquidity until the fund term concludes or units are transferred
The three categories
Category I AIF
Funds that invest in sectors the government or regulators consider socially or economically desirable, and which therefore attract certain concessions. This category covers venture capital funds, angel funds, SME funds, social impact funds and infrastructure funds.
- Invests in start-ups, early-stage ventures, SMEs, social ventures and infrastructure
- Close-ended, with a minimum tenure of three years and extensions permitted with investor consent
- No leverage permitted other than temporary borrowing for day-to-day needs
- Angel funds are a sub-category with a lower minimum commitment for angel investors
- Pass-through tax status — income is taxed in the hands of the investor, not the fund
Category II AIF
The residual category: funds that are neither Category I nor Category III, do not use leverage other than for operational needs, and receive no specific regulatory concession. In practice this is where most of the Indian AIF corpus sits — private equity, private credit, real estate and structured debt funds.
- Private equity, private credit, real estate, distressed asset and structured debt funds
- Close-ended, with a minimum tenure of three years
- No leverage except short-term borrowing for operational requirements
- Typically the largest category by committed capital in India
- Pass-through tax status, except that business income is taxed at the fund level
Category III AIF
Funds that employ complex or diverse trading strategies and may use leverage, including through investment in listed or unlisted derivatives. Long-short equity funds and absolute return funds sit here. This is the only category that may be open-ended.
- Long-short equity, absolute return, arbitrage and other complex strategies
- May be open-ended or close-ended, so periodic redemption windows are possible
- Leverage permitted up to two times the fund corpus, subject to disclosure
- Positions may be taken in listed and unlisted derivatives
- Taxed at the fund level, so investors receive distributions net of tax