Alternative Investment Funds (AIFs) in India: Types, Benefits, Eligibility & How They Work

Published on April 05, 2023 | 6 min read

AIFs are private investment vehicles for HNIs and institutional investors with significant capital for investment. Here’s everything you need to know about Alternative Investment Funds (AIFs) in India.

Key Takeaways

Alternative Investment Funds (AIFs) are private investment vehicles that pool money from domestic and foreign investors to invest in assets such as private equity, venture capital, and hedge funds.
AIFs are divided into three categories: Category I , Category II , and Category III. These categories invest in different types of assets and apply different investment strategies to generate returns for their investors.
High Net-Worth Investors (HNIs) and institutional investors make significant investments in AIFs which are then invested as per the fund’s specific strategy.
Depending on the AIF category and structure, investors may have their capital committed for a defined period. Many Category I and II AIFs are close-ended, while Category III AIFs may be open-ended.

Alternative Investment Funds are generally popular among HNIs and institutional investors seeking exposure to emerging companies and other alternative assets, and who are comfortable with longer lock-in periods to earn potentially significant returns.

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Let’s understand what AIFs are, their types, how they work, and eligibility criteria.

What Is an Alternative Investment Fund (AIF)?

An Alternative Investment Fund (AIF) is a private investment vehicle that pools money from HNIs and institutional investors and invests it across non-traditional assets such as private equity, venture capital, and hedge funds. To be eligible to invest in AIFs, the minimum entry amount is ₹1 crore.

In India, AIFs are strictly regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Alternative Investment Funds) Regulations, 2012.

Types of Alternative Investment Funds in India

SEBI classifies AIFs into three categories based on their investment strategies and risk levels.

Category I AIF

Category I AIFs invest in emerging companies, startups, social, or sectors considered socially or economically desirable and actively promoted by the government for job creation. Venture capital funds, SME funds, Infrastructure funds, and Social Impact funds are included in this category.

Category II AIF

Category II funds invest in traditional private market investments that do not fit into Category I or III. These funds do not depend on leverage for investment purposes and borrow only to meet daily operational needs. Private equity funds, Debt or Credit funds, Real estate funds, and funds of funds are included in this category.

Category III AIF

Category III funds implement complex trading strategies, which may include derivatives and short-selling, and use leverage to maximise returns. Hedge funds and Private Investment in Public Equity (PIPE) Funds are included in Category III AIF.

Who Can Invest in AIFs in India?

The following entities and individuals can invest in AIFs in India.

Resident Indian

Indian residents who meet the applicable eligibility requirements and minimum investment threshold can invest in AIFs.

Non-Resident Indians (NRIs)

NRIs living abroad can also invest in AIFs in India, obeying applicable regulations and requirements.

Foreign Nationals or Investors

Individuals with foreign nationality can invest in Indian AIFs provided that they belong to a country whose regulator is a signatory to the IOSCO Multilateral Memorandum of Understanding or has a bilateral MoU with SEBI, and is not listed under FATF (Financial Action Task Force) anti-money laundering deficiencies.

Institutional Investors

Institutional investors such as banks, insurance companies, pension funds, and NBFCs (Non-Banking Financial Companies) can invest in AIFs but must abide by specific sectoral caps and guidelines set by their respective regulatory bodies.

Corporates

Companies, trusts, or limited liability partnerships (LLPs) looking for alternative asset classes can invest in AIFs, following applicable eligibility and regulatory requirements.

Benefits and Risks of Investing in AIFs

The following is a detailed table explaining the benefits and risks of investing in AIFs in India.

Feature	Benefits of AIFs	Risks of AIFs
Exposure	Invest in private equity, venture capital, and companies not listed on stock exchanges.	Investments may involve volatile, complex, or non-profit-generating assets that are difficult to value.
Diversification	Help spread risk by investing in assets beyond traditional stocks and bonds.	May involve high concentration risk if the fund focuses on a few startups or a specific sector.
Liquidity	Certain Category III open-ended AIFs may offer moderate liquidity, depending on their terms.	Some AIFs have low liquidity and multi-year lock-in periods, with limited opportunities for early exit.
Management	Professionally managed by fund managers with investment expertise and experience.	Performance depends heavily on the fund manager's skill and strategy, with no guarantee of returns.
Cost & Entry	Offer access to tailored, large-scale investment strategies.	Typically require a high minimum investment of ₹1 crore and may have significant management and performance fees.

Alternative Investment Funds (AIFs) are private investment vehicles that collect money from HNIs and institutional investors and invest it across non-traditional assets such as venture capital, hedge funds, and private equity to generate returns. To be eligible to invest in AIFs, in most cases, investors must invest a minimum of ₹1 crore.

AIFs are strictly regulated by SEBI and are managed by professional fund managers who seek to generate returns in line with the fund’s investment strategy. Investors must weigh the benefits and risks of investing in AIFs before investing to make informed investment decisions.

FAQs

What is an Alternative Investment Fund (AIF)?

An AIF is a private investment fund that pools money from HNIs and institutional investors and invests it as per the fund’s strategy.

What are the types of AIFs in India?

In India, there are three categories of AIFs in India such as Category I, Category II, and Category III, that invest in different types of assets.

Who can invest in an AIF?

AIFs are generally meant for HNIs and institutional investors with a minimum of ₹1 crore in capital for investment.

What are the benefits of investing in an AIF?

Investing in an AIF provides benefits such as access to high-growth, diversified asset classes with the potential for higher returns compared to traditional market investments.

Are AIF investments risky?

Yes, AIFs are considered risk investments as it carries low liquidity, long lock-in periods, and exposure to unlisted startups or leveraged trading strategies.

About Author

Mariyam Sara

Sub-Editor

holds an MBA in Finance and is a true Finance Fanatic. She writes extensively on all things finance whether it’s stock trading, personal finance, or insurance, chances are she’s covered it. When she’s not writing, she’s busy pursuing NISM certifications, experimenting with new baking recipes.