AIF

An Alternative Investment Fund is a privately pooled fund that collects money from sophisticated investors and invests according to a defined strategy. AIFs are registered with SEBI and fall into three categories:

• Category I — funds investing in start-ups, early-stage ventures, social ventures, SMEs and infrastructure, among others.
• Category II — funds such as private equity and private credit funds that are not in Category I or III and use limited borrowing.
• Category III — funds that may use complex trading strategies and leverage, including long–short equity strategies.

Why it matters

AIFs give access to strategies and assets not available through mutual funds — unlisted companies, private credit, hedged equity. That access comes with high minimum investments, limited liquidity and greater complexity.

How to read it

• Liquidity. Many AIFs are close-ended with long tenures; you may not be able to exit early.
• Fees. Management fees and performance fees (carried interest) are common. Understand hurdle rates and how fees are calculated.
• Valuation. Unlisted holdings are valued periodically, not daily, so reported values can lag reality.
• Tax. Treatment differs by category; in some categories income is passed through to investors.

Common misconceptions

• “Alternative means uncorrelated and safe.” Some strategies carry substantial risk, leverage or illiquidity.
• “Private fund returns compare directly with mutual funds.” Measurement methods, fees and liquidity differ.

In India: Under current SEBI rules, the minimum investment in most AIFs is ₹1 crore per investor, with exceptions such as for accredited investors and certain employees. Each fund’s private placement memorandum sets out its terms.