What is an AIF?
An AIF (Alternative Investment Fund) is a privately pooled investment fund registered with SEBI under the AIF Regulations, 2012. It collects money from a small group of wealthy investors and invests it in areas such as start-ups, private companies, private credit, real estate or special trading strategies. The minimum investment is ₹1 crore, and a scheme can have at most 1,000 investors.
The three categories of AIF
- Category I: venture capital, angel, SME, social impact and infrastructure funds. They back new or small businesses and projects that the government wants to encourage.
- Category II: private equity, private debt and funds of funds. They cannot borrow to invest, except for short-term operational needs.
- Category III: funds that trade listed securities with advanced strategies, such as long-short equity or derivatives, and may use leverage. Most AIF returns published online are for this category.
AIF vs PMS vs mutual fund
| AIF | PMS | Mutual fund | |
|---|---|---|---|
| Minimum investment | ₹1 crore | ₹50 lakh | ₹100 to ₹5,000 |
| Structure | Pooled fund for a few investors | Your own portfolio in your demat account | Pooled fund open to everyone |
| What it can invest in | Private companies, credit, real estate, long-short | Mainly listed shares | Listed shares, bonds, gold |
| Withdrawals | Often locked in for 3+ years | Any time, with exit load in the first 3 years | Usually any time |
| Tax | Cat I and II: in your hands. Cat III: at fund level | On every sale, in your hands | Only when you redeem |
| Regulator | SEBI | SEBI | SEBI |
Frequently asked questions
What is an AIF?
An AIF (Alternative Investment Fund) is a privately pooled fund registered with SEBI that invests in things a mutual fund usually does not, such as start-ups, private companies, private credit, real estate or long-short equity strategies. It is meant for wealthy and experienced investors.
What is the minimum investment in an AIF?
SEBI sets the minimum at ₹1 crore per investor. Employees and directors of the fund manager can invest from ₹25 lakh.
What are Category I, II and III AIFs?
Category I invests in start-ups, small businesses, social ventures and infrastructure. Category II covers private equity, private debt and funds of funds, and cannot borrow to invest. Category III uses trading strategies, including long-short and derivatives, and may use leverage.
How are AIFs taxed?
Category I and II AIFs are pass-through: most income is taxed in the investor’s hands as if they earned it directly. Category III AIFs are taxed at the fund level, so investors usually receive returns after tax.
Can I withdraw money from an AIF at any time?
Usually not. Category I and II AIFs are close-ended with a life of at least three years. Category III AIFs can be open-ended, but exits may be limited to set windows and can carry exit charges.
What fees do AIFs charge?
Most charge a yearly management fee (often about 1.5% to 2.5% of the money invested) and a share of profits above a hurdle rate (often 10% to 20%), plus GST. Check the private placement memorandum for the exact terms.
Also see PMS returns and mutual fund returns.