Introduction
Alternative Investment Funds (AIFs) are a category of pooled investment vehicles that raise
capital from sophisticated investors, both Indian and foreign, to invest according to a defined
investment policy for the benefit of their investors. Governed by the Securities and Exchange
Board of India (SEBI), AIFs provide an alternative to traditional investment avenues like
stocks, bonds, and mutual funds, and offer exposure to a wide range of asset classes including
private equity, real estate, venture capital, hedge funds, and more.
Categories of AIFs
In India, AIFs are classified into three categories, each with distinct investment strategies and
regulatory requirements:
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Category I AIFs:
These funds typically invest in start-ups, early-stage ventures,
social ventures, Small and Medium Enterprises (SMEs), infrastructure, or other sectors
considered socially or economically desirable. This category includes Venture Capital Funds
(VCFs), SME Funds, Social Venture Funds, and Infrastructure Funds. SEBI provides certain
incentives and concessions to Category I AIFs to encourage investments in these sectors.
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Category II AIFs:
These funds do not fall under Category I or III and typically
invest in private equity or debt securities. Examples include Private Equity Funds and Debt
Funds. These funds do not enjoy any specific incentives or concessions but are popular among
investors for their potential high returns and diversified portfolios.
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Category III AIFs:
These funds employ diverse or complex trading strategies and may
leverage or borrow to invest in listed or unlisted derivatives. Hedge Funds are a common
example of Category III AIFs. These funds are subject to higher regulatory scrutiny due to
their potential risks and leverage usage.
