Alternative Investment Fund
Also written AIF · Privately Pooled Investment Vehicle · Alternative Investment Fund (AIF)
A privately pooled investment vehicle registered with SEBI that raises money from select Indian or foreign investors under a defined investment policy — never from the public at large.
In plain language
A mutual fund is sold to anybody who walks in. An AIF is the opposite by design.
The SEBI (Alternative Investment Funds) Regulations, 2012 define an AIF. It is a privately pooled investment vehicle. The money can be Indian or foreign. It is collected for a defined investment policy.
"Privately pooled" is the key phrase. The money comes from select investors, not the general public. These are institutions and HNIs, or high net worth individuals. They can understand higher risk and complex arrangements.
The main economic difference is illiquidity. That means the investment is hard to turn into cash. Traditional investments are listed stocks and bonds, mutual fund units and ETFs. They trade on a market and are close to cash. You can exit through the market or by redemption. Alternative investments are not easy to turn into cash. They are either off-market or too complex to have a ready market. AIFs are meant to sit alongside traditional investments for such investors. The aim is better risk-adjusted returns over the long term.
How it works
The regulations fix the shape of the fund with hard numbers:
- Each scheme must have a corpus of at least Rs 20 crore.
- The AIF shall not accept an investment of value less than Rs 1 crore from an investor. For employees or directors of the AIF or of the Manager, the minimum is Rs 25 lakh.
- The Manager or Sponsor must keep a continuing interest of not less than 2.5% of the corpus or Rs 5 crore, whichever is lower — and for Category III, 5% of the corpus or Rs 10 crore, whichever is lower — not through a waiver of management fees, and disclosed to investors.
- No scheme may have more than 1,000 investors, and funds may be raised only by private placement.
- Concentration: Category I and II may invest not more than 25% of investable funds in one investee company; Category III, not more than 10%.
- Investing in associates requires approval of 75% of investors by value.
- Units of a close-ended AIF may be listed, subject to a minimum tradable lot of Rs 1 crore, and only after the final close of the fund or scheme.
SEBI has also allowed an accredited investor framework, which manufacturers may adopt but need not. A few AIFs have, offering a ticket size of Rs 25 lakh instead of Rs 1 crore. An individual qualifies on annual income ≥ Rs 2 crore; or net worth ≥ Rs 7.5 crore of which at least Rs 3.75 crore is financial assets; or annual income ≥ Rs 1 crore plus net worth ≥ Rs 5 crore of which at least Rs 2.5 crore is financial assets.
The three categories. Category I invests in start-ups or early-stage ventures, social ventures, SMEs, infrastructure, or sectors the government or regulators consider socially or economically desirable — venture capital funds, SME funds, social venture funds, infrastructure funds, special situation funds. Category II is defined negatively: whatever is neither I nor III and does not undertake leverage or borrowing other than to meet day-to-day operational requirements — private equity funds, debt funds. Category III employs diverse or complex trading strategies and may employ leverage, including through listed or unlisted derivatives — hedge funds and short-horizon funds.
A worked example
A Category II private credit fund raises a scheme of Rs 300 crore.
| Requirement | Working | Result |
|---|---|---|
| Minimum scheme corpus | — | Rs 20 crore ✓ (Rs 300 crore raised) |
| Minimum cheque, outside investor | — | Rs 1 crore |
| Minimum cheque, employee/director of the Manager | — | Rs 25 lakh |
| Manager's continuing interest | lower of 2.5% × 300 cr = Rs 7.5 cr, and Rs 5 cr | Rs 5 crore |
| Maximum into one investee company | 25% × Rs 300 crore | Rs 75 crore |
| Maximum investors in the scheme | — | 1,000 |
Now make it a Category III fund instead, changing nothing else. The Manager's continuing interest becomes the lower of 5% × Rs 300 crore = Rs 15 crore and Rs 10 crore, so Rs 10 crore; and the single-company cap drops from 25% to 10%, so Rs 30 crore. Same corpus, materially different fund.
The suitability question an adviser actually faces. A client aged 54 has financial assets of Rs 1,20,00,000 and wants in. The entry ticket is Rs 1 crore. That is 83% of his liquid net worth committed to a single close-ended, illiquid fund with no redemption window — and listing would not rescue him, since the minimum tradable lot is itself Rs 1 crore and listing is permitted only after final close.
He does not qualify as an accredited investor either: Rs 1.2 crore of financial assets is nowhere near the Rs 7.5 crore net worth (with Rs 3.75 crore financial) or the Rs 2 crore income test. The answer is no, and the reason is the ticket size against his balance sheet, not the fund's track record.
Why NISM asks about it
Chapter 13 (Overview of Alternative Investment Funds) — 13.3 for the SEBI requirements and 13.4 for the categories and types. This chapter is almost entirely numeric recall: minimum corpus, minimum investment, the investor cap, the sponsor commitment (and the "whichever is lower" wording), the concentration limits by category, the listing lot, and the accredited investor thresholds. The other reliable question is classification: given a description of a fund, which category does it fall into?
Common exam traps
- Category II is defined negatively — not I, not III, and no leverage or borrowing beyond day-to-day operational requirements. There is no positive list to memorise.
- Leverage is the Category III marker. A fund running complex strategies with derivatives is III however private-equity-like its name sounds.
- The sponsor commitment is "whichever is lower", not higher. 2.5% of corpus or Rs 5 crore; for Category III, 5% or Rs 10 crore. Candidates reflexively pick the bigger number.
- Rs 25 lakh is not a general small-ticket route. It applies to employees and directors of the AIF or Manager, and separately under the accredited investor framework — which SEBI has allowed but not made compulsory for manufacturers.
- Listing does not create liquidity. Minimum tradable lot Rs 1 crore, close-ended funds only, and only after final close.
- The concentration limit differs by category — 25% for I and II, 10% for III — and it is measured on investable funds, not on the corpus.
- An AIF is not a mutual fund. It shall not solicit or collect funds except by way of private placement, and there is a limit of 1,000 investors per scheme.
Where this is taught
- Series III-C · Chapter 15: SEBI (AIF) Regulations, 2012introduced here
- Series XXI-B · Chapter 1: Investment Landscapeintroduced here
- Series II-A · Chapter 4: Characteristics of Other Securitiesintroduced here
- Series X-A · Chapter 5: Introduction to Indian Financial Marketsintroduced here
- Series XIX-E · Chapter 2: Types of Investmentsintroduced here
- Series XIX-D · Chapter 2: Types of Investmentsintroduced here
- Series XIX-B · Chapter 1: Overview of Alternative Investmentsintroduced here
- Series XIX-A · Chapter 1: Overview of Alternative Investmentsintroduced here
- Series X-B · Chapter 12: Taxation of Other Productsintroduced here
- Series XXI-A · Chapter 1: Investmentsintroduced here
- Series X-A · Chapter 13: Overview of Alternative Investment Funds (AIFs)
- Series XIX-E · Chapter 4: Alternative Investment Funds in India and its Suitability
- Series XXI-A · Chapter 6: Collective Investment Vehicles
Related terms
- Accredited InvestorAn investor certified by an accreditation agency as meeting SEBI's income or net-worth tests, and therefore allowed into products on relaxed terms — including below the Rs 1 crore AIF floor.
- Private placementAn issue of securities to a select group of identified investors — institutions, banks, mutual funds — rather than to the public, with fewer formalities and no advertising.
- Portfolio managerA body corporate registered with SEBI that, under a contract with a client, advises on or manages that client's securities or funds — discretionary, non-discretionary or advisory.
- Category I AIFThe AIF category for funds the government or a regulator treats as socially or economically desirable — venture capital, angel, SME, social impact, infrastructure, special situation and CDMDF funds.
- Hedge FundA pooled vehicle using diverse or complex trading strategies, long and short positions and fund-level leverage — in India, the AIF Regulations place hedge funds in Category III.
- Venture Capital FundA Category I AIF that invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings, and includes migrated venture capital funds.
- Category III AIFThe AIF category for funds running diverse or complex trading strategies with leverage — hedge funds and their kin — and the only category denied tax pass-through status.
- Portfolio Management ServicesA tailored investment service where the client owns the securities directly in their own name, regulated under the SEBI (Portfolio Managers) Regulations, with a minimum investment of Rs 50 lakh.
- Alternative InvestmentA financial asset outside the conventional categories of stocks, bonds and cash — defined by what it is not, and marked above all by illiquidity.
- InvestmentThe current commitment of savings for a defined period, in the expectation of receiving back more than was committed — savings put to work, as distinct from savings merely held.
- Private EquityEquity capital raised by companies from external investors without going to the public markets — direct investment in businesses that are not listed on a stock exchange.
- Retail Individual InvestorUnder the SEBI ICDR Regulations, 2018, an individual investor who applies or bids for specified securities for a value of not more than Rs 2 lakh.
- Aggregate Escrow Demat AccountA separate demat account an AIF opens solely to hold demat units for investors who have not yet given their demat details; units move out to the investor within 5 working days once details arrive.
- Category II AIFThe residual AIF category: anything that is neither Category I nor Category III and takes no fund-level leverage beyond a narrow temporary carve-out — private equity, private debt and fund-of-funds.
- Corporate Debt Market Development FundA close-ended Category I AIF, formed as a trust with a 15-year tenure, that buys investment-grade corporate bonds from debt mutual fund schemes when SEBI declares a market dislocation.
- Investment Manager approvalThe requirement that an off-market transfer or pledge of AIF units in dematerialised form succeeds only after the fund's Investment Manager has approved it, where the AIF's own documents require that approval.
- Investable FundsThe corpus of an AIF scheme net of the administration and management expenditure estimated for the fund's tenure — the base on which Social Impact Fund investment limits are measured.
- Real Estate Investment TrustA SEBI-registered trust that pools investors' money into commercial real estate and lists its units on a stock exchange, so rent-yielding property can be bought in small lots and sold in a day.
- Managed portfolioAn investment made through a professionally managed vehicle that pools investors money — a mutual fund, AIF, portfolio manager or collective investment scheme — rather than bought directly.
- Accreditation agenciesThe subsidiaries of stock exchanges or depositories, or other SEBI-specified entities, that verify an applicant's income and net worth and issue the certificate that makes them an accredited investor.
- Angel FundA sub-category of Category I AIF, registered with SEBI specifically as an angel fund, which raises money from angel investors and invests it in start-ups deal by deal rather than through schemes.
- Angel InvestorAn accredited investor, or key management personnel of an angel fund or its manager, who puts capital into start-ups and early-stage ventures through an angel fund.
- Private Equity FundAn AIF investing primarily in equity or equity-linked instruments or partnership interests of investee companies — a Category II fund, and the later-stage counterpart to a venture capital fund.
- Special Situation FundA sub-category of Category I AIF that invests only in special situation assets — stressed loans, security receipts and the securities of defaulting companies — and may act as a resolution applicant under the IBC.
- Infrastructure FundA Category I AIF investing primarily in the unlisted securities, partnership interest or listed and securitised debt of companies and SPVs that operate, develop or hold infrastructure projects.
- CustodianThe SEBI-registered entity that holds a fund's securities in accounts of its own and settles its trades, so the assets sit somewhere other than with the manager who decides what to buy.
- Specialized Investment FundA mutual fund product line introduced by SEBI in 2024 for sophisticated strategies, with a minimum investment of Rs 10 lakh across all of an AMC's strategies — sitting between mutual funds and PMS.
- Fund of fundsAn AIF that invests in the units of other AIFs rather than directly in investee companies — buying diversification across managers and strategies, and paying two layers of fees for it.
- Management FeeThe fixed annual fee an AIF pays its investment manager for managing the fund — charged on committed capital in Category I and II funds and on gross NAV in Category III, regardless of performance.
- ClawbackAn investor right to recover carried interest already paid to the manager on early successful exits, when later failed investments mean the manager was overpaid across the fund's whole life.
- First CloseThe date an AIF scheme declares it has raised enough commitments to proceed — the point from which tenure, management fees and set-up cost amortisation all start running.
- SettlorThe party who brings an AIF trust into existence — executing the trust deed with the trustee and conveying the initial sum that becomes the trust's first asset.
- Stewardship codeSEBI's mandatory code requiring all AIFs and mutual funds to monitor, engage with and vote in the listed companies they invest in — and to publish the policies by which they do it.
- Compliance Test ReportThe annual self-certification an AIF manager prepares in SEBI's prescribed format, testing the fund against the AIF Regulations and routed through the sponsor and trustee for comment.
- Venture DebtSpecialised lending to start-ups that have already raised institutional venture equity — unsecured, priced above commercial rates, repaid in two to three years, usually with an equity kicker attached.
- IPEV GuidelinesThe international best-practice guidelines for valuing unlisted private equity and venture capital investments at fair value, setting out seven widely used methods for valuing a portfolio company.
- Blind poolA fund in which investors commit capital to the pool rather than to named deals — the manager chooses the investments afterwards, which is why the subscription agreement must settle everything in advance.
- Adverse selectionThe risk of ending up with the wrong manager — picking a fund on a track record or a forward-looking statement that does not predict performance, and getting sub-optimal returns or moral hazard instead.
- Cyber Security RiskThe risk that an AIF's or its service providers' systems are breached, corrupted or disrupted — governed by SEBI's Cyber Security and Cyber Resilience Framework, which all AIFs had to comply with by 31 August 2025.
- Corporate Venture CapitalA large firm taking an equity stake in a small innovative company, often adding management and marketing expertise — a strategic on-balance-sheet investment rather than a pooled fund.
- CrowdfundingRaising small amounts from a large number of individuals through a web platform for a project, venture or cause — a seed-stage and social funding route in India, but not a practical equity route.
- P2P LendingLoans raised through a web-based crowdfunding platform that matches individual lenders directly to individual borrowers, regulated in India by the RBI rather than SEBI.
- Source based taxationIndia taxes capital gains where the income arises — inside India — rather than by the investor's residence, which is why offshore AIF structures exist to avoid the same gain being taxed twice.
- Social unitsUnits of a social impact fund issued to investors who have agreed to receive only social returns or benefits — no financial return — against their contribution.
- Classes of InvestorThe workbook's three-way split of who buys securities — institutional, non-institutional and retail — sorted by the size of the cheque and the sophistication of the strategy.
- National Investment and Infrastructure FundThe Government of India's own alternative investment fund, set up in 2015 as a Category II AIF to invest in infrastructure and strategic assets.
- Family OfficeA private office that manages one or more wealthy families' money — a non-institutional investor under the workbook's classification, and one of the main domestic sources of AIF capital in India.
- FoundationA not-for-profit organisation that donates funds and supports other organisations for charitable purposes — an AIF investor whose long horizon lets it carry illiquidity.
- BRSR CoreThe tighter core of SEBI's BRSR format: 9 specified ESG key performance indicators that a listed company must disclose for its value chain in the annual report.
- Specified Alternative Investment FundThe fourth registration category SEBI inserted in 2023 for AIFs that fit none of Categories I, II and III, and for which SEBI may specify separate regulations.
- Social Impact FundA Category I AIF investing primarily in social ventures and social enterprises, which satisfies the social performance norms laid down by the fund and may both take and give grants.
- Venture Capital UndertakingA domestic company that is not listed on a recognised stock exchange at the time the investment is made — the defined target that a venture capital fund must put at least 75% of its investable funds into.
- Fit and proper personThe character and record test in Schedule II of the SEBI (Intermediaries) Regulations, 2008 that an AIF's applicant, sponsor and manager must satisfy for registration and must keep satisfying afterwards.
- Key Management PersonnelThe key investment team of an AIF's manager, the employees who decide on behalf of the fund, and anyone else the AIF or manager declares as such — named in the PPM and bound by the Code of Conduct.
- Investment Management AgreementThe agreement between the trustee, acting for the AIF, and the investment manager, by which the trustee delegates its entire investment management power — and by which the manager can later be removed.
- Co-investmentInvestment by a manager, sponsor or investor of a Category I or II AIF directly into an investee company that the AIF is itself investing in, alongside the fund rather than through it.
- Total Value to Paid-in CapitalA fund's investment multiple: cumulative distributions plus the residual value of unsold investments, divided by paid-in capital — equivalently, DPI plus RVPI.
- General Anti-Avoidance RulesChapter X-A provisions of the Income-tax Act, applying to income arising on or after 1 April 2017, letting the tax authorities deny the benefit of an arrangement that lacks commercial substance and exists mainly for tax.
- Migrated Venture Capital FundA fund once registered under the SEBI (Venture Capital Funds) Regulations, 1996 that re-registered under the AIF Regulations as a Category I venture capital fund. It may not launch new schemes.
- Person of Indian OriginA citizen of a country other than Bangladesh, Pakistan, Afghanistan, China, Iran, Bhutan, Sri Lanka and Nepal who once held an Indian passport or whose parent, grandparent or great-grandparent was an Indian citizen.
- Special Situation AssetAn asset a special situation fund may invest in: stressed loans, ARC security receipts, and securities of companies whose loans are stressed, under IBC resolution or in continuing default.
- Business Responsibility and Sustainability ReportingSEBI's standardised, quantitative ESG disclosure format for India's top 1,000 listed companies by market capitalisation, mandatory from FY 2022-23, replacing the older Business Responsibility Report.
- Foreign Liabilities and Assets (FLA) ReturnThe annual RBI return a Category I or II AIF must file by 15 July each year if it has received or made foreign investment, filed through the FLAIR portal.
- Pure Domestic AIFThe simplest AIF structuring template: one pool set up and registered in India under the AIF Regulations, with every investor, the manager and the sponsor all resident in India for FEMA and tax purposes.
- InvITAn Infrastructure Investment Trust: a SEBI-regulated trust that pools investor money into infrastructure assets such as roads, power transmission lines and renewable energy projects.
- Collective investment vehicleA structure that pools money from many investors and invests it together — in India, mutual funds, REITs, InvITs and AIFs, each following a trust-based model governed by SEBI.
← All terms