NISM Series X-A · Chapter 13: Overview of Alternative Investment Funds (AIFs)

L1 · Foundation

Foundation — Alternative investments, their evolution and the SEBI framework

What makes an investment alternative rather than traditional, the evolution of AIFs in India from 1980s venture capital onwards, the definition of a privately pooled vehicle, and the full set of SEBI conditions on investment, accredited investors, listing and investment limits.

13 min read · Worth 5% of the paper · Written from pages 233–242 of the official NISM workbook · Updated 17 September 2026

13.1 Introduction to alternative investments

"Globally the alternative investment industry has evolved over time, hence THERE IS NO UNIFORM CLASSIFICATION OR LIMITATION AS TO WHAT CONSTITUTES SUCH ASSETS. Alternative investments are therefore defined generally... as INVESTMENTS OTHER THAN TRADITIONAL INVESTMENTS".

What traditional investment means

"TRADITIONAL INVESTMENTS (as distinguished from SAVINGS IN BANK DEPOSITS, GOVERNMENT SCHEMES, ORNAMENTAL GOLD AND RESIDENTIAL PROPERTY FOR LIVING PURPOSES) are confined to the domain of FINANCIAL SECURITIES SUCH AS STOCKS AND BONDS from primary and secondary capital market, purchase of GENERAL CATEGORIES OF MUTUAL FUND UNITS AND ETFs".

"Traditional investments CATER TO GENERAL INVESTORS who seek investment options which PROVIDE BETTER RETURNS THAN MERE SAVINGS SCHEMES".

The chapter's footnote quotes Investopedia: "An alternative investment is a FINANCIAL ASSET THAT DOES NOT FALL INTO ONE OF THE CONVENTIONAL INVESTMENT CATEGORIES. Conventional categories include STOCKS, BONDS, AND CASH".

Who alternatives are for

"Alternative investments have evolved to cater to the requirements of SOPHISTICATED INVESTORS such as INSTITUTIONAL INVESTORS managing pools of funds and HIGH NET-WORTH INDIVIDUAL INVESTORS (HNIs) who have HIGHER RISK-TAKING CAPABILITY and need MORE SOPHISTICATED AVENUES".

The essential distinction — liquidity

	Traditional investments	Alternative investments
Market	"primarily ON-MARKET opportunities"	"OFF-MARKET investments, or COMPLEX STRUCTURES that do not have a ready market"
Defining feature	"LIQUIDITY, i.e. NEARNESS TO CASH because they can be EXITED THROUGH THE MARKET or by ANYTIME REDEMPTION offered by an open ended mutual fund"	"The ESSENTIAL CHARACTERISTIC of alternative investments is 'ILLIQUIDITY', i.e. they are NOT READILY CONVERTIBLE INTO CASH"

Who invests internationally: "PENSION FUNDS, INVESTMENT FUNDS, INSURANCE COMPANIES, ENDOWMENT FUNDS, INVESTMENT BANKS, FAMILY OFFICES AND HNIs, FUND OF FUNDS AND AIF MANAGERS THEMSELVES".

13.2 Evolution and growth of AIFs in India

Period	Development
1980s	"began with VENTURE CAPITAL FINANCING, driven by STATE-LEVEL INDUSTRIAL DEVELOPMENT CORPORATIONS, FINANCIAL INSTITUTIONS, AND PSU BANKS. The late emergence was tied to MARKET CONDITIONS AND OWNERSHIP PATTERNS"
1996	"SEBI BROADENED THE SCOPE with the SEBI (VENTURE CAPITAL FUND) REGULATIONS, REMOVING THE FOCUS ON 'UNTRIED TECHNOLOGIES' and bringing PRIVATE CAPITAL INVESTMENT IN UNLISTED COMPANIES under institutional investment"
Until 2000	"TAX LAWS WERE INITIALLY UNFAVORABLE until reforms in 2000, following the K.B. CHANDRASEKHAR COMMITTEE'S RECOMMENDATIONS"
1997–2001	"The DOTCOM BOOM saw the rise of TECH-FOCUSED VCFs MODELED AFTER SILICON VALLEY"
Post-2001	"PRIVATE EQUITY EXPANDED BEYOND IT, reaching MANUFACTURING, REAL ESTATE, INFRASTRUCTURE, AND SERVICES"
By 2007	"SECTORAL BIASES FADED, and private equity extended into BANKING, LOGISTICS, E-COMMERCE, AND EVEN PROJECT FINANCING"
2008	"The FINANCIAL CRISIS DISRUPTED private equity growth, with funds STRUGGLING TO SUSTAIN INVESTMENTS AND EXIT DUE TO WEAK CAPITAL MARKETS", followed by "MACROECONOMIC ISSUES AND CONCERNS OVER REGRESSIVE TAXATION LAWS"

13.3 SEBI requirements on AIFs

The definition

"The SEBI (ALTERNATIVE INVESTMENT FUNDS) REGULATIONS 2012 define 'Alternative Investment Fund' as one which is PRIMARILY A PRIVATELY POOLED INVESTMENT VEHICLE... only a 'PRIVATELY POOLED' STRUCTURE with FUNDS POOLED FROM INDIA OR ABROAD FOR A DEFINED INVESTMENT POLICY is to be considered as an AIF".

"These private investors are sourced from categories such as INSTITUTIONS AND HNIs WHO CAN UNDERSTAND THE NUANCES OF HIGHER RISK TAKING AND COMPLEX INVESTMENT ARRANGEMENTS".

The seven conditions on investment in an AIF

	Condition
(a)	"may raise funds from ANY INVESTOR WHETHER INDIAN, FOREIGN OR NON-RESIDENT INDIANS by way of ISSUE OF UNITS"
(b)	"each scheme shall have CORPUS OF AT LEAST Rs 20 CRORES"
(c)	"shall NOT ACCEPT from an investor, an investment of value LESS THAN Rs 1 CRORE. Provided that in case of investors who are EMPLOYEES OR DIRECTORS of the AIF or of the MANAGER, the minimum shall be Rs 25 LAKH"
(d)	"the MANAGER OR SPONSOR shall have a CONTINUING INTEREST of NOT LESS THAN 2.5% OF THE CORPUS OR Rs 5 CRORE, WHICHEVER IS LOWER... and SUCH INTEREST SHALL NOT BE THROUGH THE WAIVER OF MANAGEMENT FEES. For CATEGORY III, not less than 5% OF THE CORPUS OR TEN CRORE RUPEES, WHICHEVER IS LOWER"
(e)	"the Manager or Sponsor shall DISCLOSE THEIR INVESTMENT to the investors"
(f)	"no scheme shall have MORE THAN ONE THOUSAND INVESTORS" (subject to the Companies Act, 2013 if it is a company)
(g)	"the fund shall NOT SOLICIT OR COLLECT FUNDS EXCEPT BY WAY OF PRIVATE PLACEMENT"

Accredited investors

"SEBI has allowed the concept of ACCREDITED INVESTOR, THOUGH IT IS NOT COMPULSORY FOR PRODUCT MANUFACTURERS TO ADOPT IT. A few AIFs have adopted this, and are OFFERING THE FACILITY OF TICKET SIZE Rs 25 LAKH INSTEAD OF Rs 1 CRORE".

Individuals, HUFs, Family Trusts and Sole Proprietorships qualify on any one of three tests:

"Annual Income ≥ INR 2 CRORE"; OR.
"Net Worth ≥ INR 7.5 CRORE, out of which AT LEAST INR 3.75 CRORE IS IN THE FORM OF FINANCIAL ASSETS"; OR.
"Annual Income ≥ INR 1 CRORE PLUS Net Worth ≥ INR 5 CRORE, out of which at least INR 2.5 CRORE is in financial assets".

Other entities:

"Partnership Firms set up under the INDIAN PARTNERSHIP ACT, 1932 in which EACH PARTNER INDEPENDENTLY MEETS THE CRITERIA".
"Trusts (OTHER THAN FAMILY TRUSTS) with net worth ≥ INR 50 CRORE".
"Body Corporates with net worth ≥ INR 50 CRORE".

Listing

The six investment conditions

	Condition
(a)	"may invest in SECURITIES OF COMPANIES INCORPORATED OUTSIDE INDIA subject to conditions stipulated by the RESERVE BANK OF INDIA AND SEBI"
(b)	"CO-INVESTMENT in an investee company by a Manager, Sponsor or co-investor shall NOT BE ON TERMS MORE FAVOURABLE than those offered to the AIF"
(c)	"CATEGORY I AND II shall invest NOT MORE THAN 25 PER CENT of the INVESTABLE FUNDS in an investee company, directly or through units of other AIFs"
(d)	"CATEGORY III shall invest NOT MORE THAN 10 PER CENT of the investable funds in an Investee Company"
(e)	"shall NOT INVEST IN ASSOCIATES EXCEPT WITH THE APPROVAL OF 75 PER CENT OF INVESTORS BY VALUE of their investment"
(f)	"UN-INVESTED portion may be invested in LIQUID MUTUAL FUNDS OR BANK DEPOSITS OR OTHER LIQUID ASSETS OF HIGHER QUALITY SUCH AS TREASURY BILLS, CBLOs, COMMERCIAL PAPERS, CERTIFICATES OF DEPOSITS till deployment"

Think of it like this

Liquidity is the line between traditional and alternative

The chapter refuses to define alternatives by asset type, because "THERE IS NO UNIFORM CLASSIFICATION." Instead it draws the line on access to cash. Traditional investments share "LIQUIDITY, i.e. NEARNESS TO CASH", because you can exit "through the market or by ANYTIME REDEMPTION offered by an open ended mutual fund." Alternatives are defined by the opposite: "The ESSENTIAL CHARACTERISTIC of alternative investments is ILLIQUIDITY." Either they are off-market, or they are "complex structures that do not have a ready market."

Privately pooled means a thousand, not the public

The single most load-bearing phrase in the AIF definition is "privately pooled", and the chapter spells out its consequence: the fund is "pooled from SELECT INVESTORS AND NOT FROM THE GENERAL PUBLIC AT LARGE. THERE IS A LIMIT OF 1000 INVESTORS THROUGH PRIVATE PLACEMENT." Reinforced by condition (g): the fund "shall NOT SOLICIT OR COLLECT FUNDS EXCEPT BY WAY OF PRIVATE PLACEMENT." A mutual fund advertises; an AIF may not.

Skin in the game, and it cannot be a bookkeeping entry

The continuing interest requirement has a clause designed to stop it being faked: the manager or sponsor must hold 2.5 per cent of corpus or Rs 5 crore, whichever is lower — and "SUCH INTEREST SHALL NOT BE THROUGH THE WAIVER OF MANAGEMENT FEES." Real money must go in. For Category III, where strategies are riskiest, the bar doubles to 5 per cent or Rs 10 crore, whichever is lower. And the holding must be disclosed to investors.

Whichever is LOWER protects the large fund, not the small one

Read the sponsor commitment carefully: 2.5 per cent of corpus OR Rs 5 crore, whichever is lower. On a Rs 100 crore fund, 2.5 per cent is Rs 2.5 crore — the lower figure, so that applies. On a Rs 500 crore fund, 2.5 per cent would be Rs 12.5 crore, but the Rs 5 crore cap bites. The rule therefore imposes a percentage on small funds and an absolute ceiling on large ones. The same structure applies to Category III at 5 per cent or Rs 10 crore.

Rs 1 crore, unless you work there or are accredited

The AIF minimum has two documented exceptions. Employees and directors of the AIF or its manager may invest Rs 25 lakh. And separately, accredited investors may be offered "the facility of ticket size Rs 25 LAKH INSTEAD OF Rs 1 CRORE" — though the chapter is careful to note this is voluntary: "IT IS NOT COMPULSORY FOR PRODUCT MANUFACTURERS TO ADOPT IT. A few AIFs have adopted this."

Category III concentrates less because it trades more

The concentration limits look arbitrary until you match them to strategy. Categories I and II may put 25 per cent of investable funds into one investee company — they take long-term, illiquid stakes where concentration is the business model. Category III is capped at 10 per cent, because it "employs diverse or complex trading strategies and may employ leverage." Add leverage to concentration and losses compound; SEBI permits one or the other, not both in full measure.

A listed AIF unit still costs a crore

Listing might look like an escape from illiquidity, but the conditions preserve the private character. Only close ended AIF units may be listed; the minimum tradable lot is one crore rupees; and listing is "permitted ONLY AFTER FINAL CLOSE of the fund or scheme." You cannot buy a small parcel of a listed AIF the way you buy a share — the floor follows the unit onto the exchange.

The uninvested money must sit in something boring

Condition (f) governs the awkward gap between raising money and deploying it. The uninvested portion may go only into "LIQUID MUTUAL FUNDS OR BANK DEPOSITS OR OTHER LIQUID ASSETS OF HIGHER QUALITY SUCH AS TREASURY BILLS, CBLOs, COMMERCIAL PAPERS, CERTIFICATES OF DEPOSITS", and only "till deployment of funds as per the investment objective." An AIF may not speculate with money it has not yet found a home for.

Key terms in this chapter

Accredited investor: An investor meeting income or net worth thresholds who may be offered a reduced AIF ticket size of Rs 25 lakh instead of Rs 1 crore. Adoption of the framework is not compulsory for product manufacturers.
AIF listing conditions: Only close ended AIF units may be listed, subject to a minimum tradable lot of one crore rupees, and only after final close of the fund or scheme.
Alternative investment: An investment other than a traditional one, whose essential characteristic is illiquidity, being either off-market or a complex structure without a ready market.
Alternative Investment Fund: Under the SEBI (AIF) Regulations 2012, primarily a privately pooled investment vehicle, pooling funds from India or abroad for a defined investment policy from select investors rather than the general public.
Angel Fund: A sub-category of Venture Capital Fund under Category I that raises funds from angel investors.
Angel investor: An individual with net tangible assets of at least Rs 2 crore excluding the principal residence plus early stage, serial entrepreneur or ten-year senior management experience; or a body corporate with Rs 10 crore net worth; or a registered AIF or 1996-regime VCF.
Category I AIF: An AIF investing in start-ups, early-stage or social ventures, SMEs, infrastructure or other sectors the government or regulators consider socially or economically desirable, and which receive special incentives.
Category II AIF: The residual category, being an AIF that falls in neither Category I nor III and does not undertake leverage or borrowing other than for day-to-day operational requirements. Private equity and debt funds sit here.
Category III AIF: An AIF employing diverse or complex trading strategies which may employ leverage, including through listed or unlisted derivatives. Hedge funds and short-term trading funds sit here.
Concentration limit for AIFs: Category I and II AIFs may invest not more than 25 per cent of investable funds in one investee company; Category III not more than 10 per cent.
Continuing interest: The manager or sponsor stake of not less than 2.5 per cent of corpus or Rs 5 crore, whichever is lower, rising to 5 per cent or Rs 10 crore for Category III. It cannot be through waiver of management fees and must be disclosed.
Distressed debt financing: Providing capital to heavily indebted companies to turn around, or to fund their acquisition through auctions under the Insolvency and Bankruptcy Code 2016, a process known as insolvency resolution.
Equity linked instruments: Instruments convertible into equity shares or share warrants, preference shares, and debentures compulsorily or optionally convertible into equity.
Hedge Fund: An AIF employing diverse or complex trading strategies and trading in securities with diverse risks or complex products including listed and unlisted derivatives. It falls under Category III.
Infrastructure Fund: An AIF investing primarily in unlisted securities, partnership interest, listed or securitised debt of companies or SPVs operating, developing or holding infrastructure projects.
Mezzanine financing: Debt financing with some equity upside such as warrants attached, used by venture debt funds to finance the advanced stage of venture capital.
Private Equity Fund: An AIF investing primarily in equity, equity linked instruments or partnership interests, typically in later stage financing of businesses with established models needing to scale up.
Privately pooled: The requirement that an AIF raise funds from select investors, limited to 1,000 per scheme, solely by private placement and never by solicitation of the public at large.
Senior and subordinate debt: Senior debt is secured on assets and has first claim on cash flow; subordinate debt ranks behind it. Funding subordinate debt into an already highly geared company is called a leveraged loan.
SME Fund: An AIF investing primarily in unlisted securities of SMEs or securities of SMEs listed or proposed to be listed on an SME exchange or segment, SME having the meaning given in the MSMED Act 2006.
Social Impact Fund: An AIF investing primarily in social ventures or social enterprises satisfying the fund's social performance norms, including charitable trusts, societies, Section 8 companies and microfinance institutions.
Special Situations Fund: An AIF investing in special situation assets, which may act as a resolution applicant under the Insolvency and Bankruptcy Code, 2016.
Traditional investment: Financial securities such as stocks and bonds from primary and secondary markets, general categories of mutual fund units and ETFs, all sharing the feature of liquidity.
Venture Capital Fund: An AIF investing primarily in unlisted securities of start-ups and early-stage ventures involved in new products, services, technology or business models. It is the first stage of institutional financing after the angel stage.

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Original explanatory writing based on the official NISM workbook for Series X-A, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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