What Is an Alternative Investment Fund?
An Alternative Investment Fund (AIF) is a privately pooled investment vehicle established or incorporated in India that collects funds from sophisticated investors for investing in accordance with a defined investment policy. AIFs are regulated under the SEBI (Alternative Investment Funds) Regulations, 2012, and are distinct from traditional mutual funds.
SEBI mandates a statutory minimum investment threshold of ₹1 Crore per individual investor. A lower minimum of ₹25 Lakh applies to directors, employees, or fund managers of the respective AIF, and for Angel Funds under Category I (subject to SEBI accreditation norms).
Why This Category Exists
Traditional mutual funds are designed for broad liquidity and retail accessibility with statutory investment restrictions. AIFs provide a regulated framework for qualified investors to participate in specialized private market strategies-such as private equity, venture capital, structured credit, and long-short equity-that fall outside the scope of traditional open-ended mutual funds.
The Three SEBI Categories
- Category I AIF: Funds that invest in start-ups, early-stage ventures, social ventures, SMEs, infrastructure, or sectors viewed by the government or regulators as economically or socially beneficial. Includes Venture Capital, Angel, and Infrastructure Funds.
- Category II AIF: Covers funds that do not fall under Category I or III and do not undertake leverage except to meet day-to-day operational requirements. Includes Private Equity, Real Estate, and Private Debt Funds.
- Category III AIF: Funds employing diverse or complex trading strategies, including leverage, derivative overlays, and long-short positions in listed or unlisted securities. Includes Hedge Funds and structured PIPE strategies.
Structural & Liquidity Framework
- Tenure: Category I and Category II AIFs are mandatory close-ended structures with a statutory minimum tenure of three years, entailing significant capital lock-in.
- Category III Structure: Can be structured as open-ended or close-ended depending on the scheme's private placement memorandum (PPM).
- Investor Limits: Each AIF scheme is capped at a maximum of 1,000 investors (except Angel Funds, which follow specific regulatory caps).
Key Distinctions from Mutual Funds
AIFs differ fundamentally from mutual funds across liquidity terms, risk concentration, regulatory frameworks, and tax treatment. They are illiquid, specialized products that require a detailed understanding of the specific private placement memorandum (PPM) rather than broad benchmark tracking.
Eligibility & Suitability Criteria
Participation in AIFs is restricted to eligible investors who:
- Meet SEBI's statutory minimum commitment threshold of ₹1 Crore (or applicable accreditation criteria).
- Possess a high risk-bearing capacity capable of absorbing illiquidity and potential capital loss.
- Have an investment horizon that accommodates a multi-year lock-in period without immediate liquidity requirements.
Alternative Investment Funds are subject to SEBI (Alternative Investment Funds) Regulations, 2012. Investments are illiquid, carry substantial market and credit risks, and involve statutory lock-in periods. Sandeep Singh Kohli facilitates AIF distribution strictly on an execution basis. Please read the Private Placement Memorandum (PPM) and all scheme-related documents carefully before investing.