Open-ended AIF
Also written Open-ended fund structure · Open-ended Category III AIF
An AIF scheme that offers units continuously with no fixed maturity and lets investors redeem at set intervals — permitted only for Category III AIFs, with a variable corpus.
In plain language
An open-ended fund is a door that stays open. Investors can come in after the launch, and they can leave at regular intervals, so the size of the fund keeps changing.
That only works if the fund can sell its holdings to pay leavers. A venture capital fund holding unlisted start-up shares cannot; a hedge-fund-style strategy trading listed securities and derivatives can. So the SEBI (AIF) Regulations allow the open-ended structure only for Category III AIFs. Categories I and II must be close-ended.
In an open-ended scheme investors contribute capital when they subscribe — there is no commitment to be drawn down later.
How it works
Structure. Units are offered on a continuous basis with no fixed maturity period, so the corpus is variable. Investors may make additional contributions from time to time. The "first close" of an open-ended scheme is the close of its Initial Offer Period, and after that it can accept money at any time.
Redemption frequency — the workbook gives two lists. Chapter 8 says redemptions are permitted monthly, quarterly or semi-annually. Chapter 17 says quarterly, half-yearly or yearly. Both say "at regular intervals" set by the fund; "quarterly" is the only frequency in both lists. Chapter 6's comparison tables say only that open-ended funds allow redemption at a pre-determined frequency.
Minimum investment. The first single lump-sum investment must be at least Rs 1 crore. Additional contributions have no minimum. On a partial redemption, the amount the investor retains must not fall below Rs 1 crore.
Minimum corpus. If redemptions take the corpus below Rs 20 crore, the AIF must bring it back to Rs 20 crore within 3 months, must intimate SEBI within 2 days of receiving the redemption request that causes the breach, and if it fails, must redeem the units of all investors.
NAV. Calculated at least once a calendar month and disclosed to investors monthly (close-ended Category III: quarterly).
Redemption norms apply to all open-ended Category III AIFs and not to close-ended funds: a liquidity management policy, disclosure of the possibility of suspension of redemptions, and no new subscriptions during a suspension. The PPM sets out full or partial redemption rights and redemption gates — the maximum redemption permitted in each period, net of expenses, taxes and exit load.
Incentive fees are paid regularly in an open-ended Category III AIF, which is why the high-water mark matters most here.
A worked example
Vardhan Long-Short Fund (illustrative) is an open-ended Category III AIF with quarterly redemptions. Its corpus is Rs 23 crore.
Anil subscribes. He invests Rs 1.5 crore as his first lump sum — above the Rs 1 crore minimum. Six months later he adds Rs 20 lakh; no minimum applies to the top-up. His holding is now worth Rs 1.8 crore (ignoring returns).
Anil redeems. He wants to take out Rs 1 crore.
| Line | Rs |
|---|---|
| Holding | 1,80,00,000 |
| Requested redemption | 1,00,00,000 |
| Would be retained | 80,00,000 |
| Minimum to retain | 1,00,00,000 |
The request fails the rule. The most he can take out as a partial redemption is Rs 80 lakh; otherwise he redeems in full.
The corpus test. In the same quarter, other investors ask to redeem Rs 4 crore. The corpus would fall from Rs 23 crore to Rs 19 crore — below the Rs 20 crore floor.
| Obligation | Deadline |
|---|---|
| Intimate SEBI | Within 2 days of receiving the redemption request that causes the breach |
| Restore corpus to Rs 20 crore | Within 3 months of the breach |
| If not restored | Redeem all units of all investors |
Why NISM asks about it
Chapter 8 (Alternative Investment Fund Structuring), section 8.5 introduces open-ended and closed-ended structures; Chapter 17 (Regulatory Framework), section 17.3 restates them, section 17.7 sets the Rs 1 crore rules and section 17.8 the Rs 20 crore corpus-breach timeline, and section 17.10.2 the redemption norms. Chapter 14 gives the monthly NAV rule, and a sample question tests it as a true/false ("NAV of an open-ended Category III AIF is disclosed quarterly" — false). Expect questions on which categories may be open-ended, the corpus-breach deadlines, and the partial-redemption floor.
Common exam traps
- Only Category III may be open-ended. Categories I and II are compulsorily close-ended.
- Redemption intervals differ between chapters — monthly/quarterly/semi-annually (Chapter 8) versus quarterly/half-yearly/yearly (Chapter 17). If an option matches either list, read the question for which chapter it is drawing on.
- Rs 1 crore applies to the first lump sum and to what remains after a partial redemption, not to each top-up.
- Corpus below Rs 20 crore: 2 days to tell SEBI, 3 months to fix, then redeem everyone. Candidates swap the two numbers.
- NAV is disclosed monthly for open-ended and quarterly for close-ended Category III AIFs.
- Redemption norms do not apply to close-ended funds.
- "First close" of an open-ended scheme means the close of its Initial Offer Period.
Check yourself
1.How often must a Category III AIF disclose NAV to investors?
- a)Monthly for closed-ended funds and quarterly for open-ended funds
- b)Quarterly for closed-ended funds and monthly for open-ended funds
- c)Annually for both
- d)Daily for both
Show the answer
Answer: (b) Quarterly for closed-ended funds and monthly for open-ended funds
NAV calculated on each "Valuation Day" shall be disclosed to all investors on a quarterly basis for closed-ended AIFs and on a monthly basis for open-ended AIFs. The reason follows the product: an open-ended fund permits ongoing subscription and redemption at NAV, so investors need it more frequently. The same split governs computation: NAV should be calculated at least once in a calendar month, for open-ended Category III AIFs, or at least once in a quarter for closed-ended Category III AIFs, as on the last Business Day of such calendar month or quarter. One refinement worth carrying: in case a Category III AIF is investing in listed securities only, NAV is usually computed on a daily basis. And a structural requirement — every Category III AIF shall ensure that calculation of the Net Asset Value (NAV) is independent from its fund management function.
Where this is taught
Free preparation for NISM Series XIX-CRelated terms
- 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.
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- Exit loadA charge levied when an investor redeems units, calculated as a percentage of NAV and deducted from it, usually only if the units are sold within a stated holding period.
- LeverageControl of a large contract value for a small upfront outlay — premium for an option buyer, margin for a futures position — which multiplies percentage gains and percentage losses by the same factor.
- 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.
- High-Water MarkThe highest year-end NAV the fund has ever reached, net of operating, transaction and management costs — the manager earns no incentive fee until the NAV climbs back above it.
- Redemption GateA limit, set by the manager in the PPM, on the maximum amount investors can redeem from a Category III AIF in each redemption period — over and above expenses, taxes and exit load.
- Closed-ended AIFAn AIF scheme offered for a limited period, funded by commitments drawn down through capital calls, with no redemption before the fund winds up — compulsory for Categories I and II.
- Suspension of redemptionsAn open-ended Category III AIF halting redemptions in exceptional circumstances, justified only in investors' best interest or by SEBI — with no new subscriptions accepted while it lasts.
- Valuation DayThe day, fixed in advance by a Category III AIF and disclosed in its offer documents, as on which its NAV is determined — at least monthly for open-ended funds and quarterly for close-ended ones.
- 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.
- Fund-level leverageBorrowing or gearing taken by the AIF itself rather than inside a portfolio company — permitted for investment purposes only to Category III AIFs, and capped at 2 times NAV.