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What Are Alternative Investment Funds- A Complete Guide

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Alternative Investment Funds

India’s investment landscape is changing rapidly, and it is emerging as a preferred destination for HNIs and institutions amid the announcement of favorable economic and regulatory policies. This can be evident from the fact that the Indian Alternative Investment Funds (AIF) industry has witnessed an incredible 7 times growth in the past 5 years, reaching ₹6.94 lakh crore, according to SEBI’s data, as of June 2022.

How AIFs are different from traditional investment categories like stocks, bonds, and mutual funds, and how one can invest in AIFs is the complete guide to Alternative Investment Funds.

What are Alternative Investment Funds (AIFs)?

Like mutual funds pool money from investors to invest in publicly traded stocks, AIFs are privately pooled funds that invest in unlisted companies, startups and startup funds, late-stage or pre-IPO companies, special credit funds, etc. SEBI regulates the AIFs registered in India. These funds seek registration in one of the three categories:

Category I: The fund primarily invests in SMEs, startups, and sectors that the government considers economically and socially viable and have high growth potential. Under this category, VC Funds, Angel Funds, Infrastructure Funds, SME funds, Social Venture Funds, and other such funds are registered.

Category I: AIFs positively impact the economy by providing capital to businesses and startups that could become the next unicorns and generate employment opportunities. So, the SEBI and the Government of India offer tax incentives or concessions to Category I AIFs.

Category II: It includes private equity and debt funds. This category of AIS doesn’t get any concession or incentive from the government or any other regulator.

Category III:  AIFs classified as Category III includes hedge funds or funds that deploy complex or diverse trading strategies to profit from short-term opportunities in the market. These funds are open-ended and don’t get any tax incentives or concessions from the government.

Category I and Category II AIFs are close-ended and shall have a minimum tenure of three years, which can be extended to two years, subject to approval by two-thirds of the unit holders.

Features of AIFs

  • The minimum corpus of AIFs in all the categories should be at least ₹20 crores and ₹10 crores in angel funds.
  • The fund manager must contribute at least 2.5% of the fund size or 5% of the initial capital investment.
  • The maximum number of investors in an AIF should not exceed 1000, except in angel funds, where the maximum number of investors should be 49
  • AIF should collect funds only for private placements
  • AIFs come with a minimum investment lock-in period of three years

Who can invest in Alternative Investment Funds?

As mentioned earlier, AIFs have become the sweet tooth of HNIs and institutions in the investing world.

In 2012, SEBI introduced the SEBI (AIF) Regulations 2012 to recognize AIFs in India, and initially, Indians and Indian entities could invest. But, in 2016, the Government of India allowed foreign investments in AIFs.

One should meet the following criteria to invest in AIFs:

  • Should be Resident Indians, NRIs, PIOs, OCIs, and foreign nationals
  • The minimum investment limit is ₹1 crore for specified investors, whereas the minimum investment for directors, employees, and fund managers is ₹25 lakhs.

Benefits of Investing in AIFs

The following are the benefits of investing in AIFs:

New investment avenues: Gets direct access to new and emerging investment opportunities early and higher return potential compared to return potential in traditional investment asset classes.

Uncorrelated asset class: As AIFs make only private placement of funds, meaning investing in early-stage startups, and other sectors that are not directly related to the stock market, AIFs are less volatile compared to traditional equity investments. It helps to make a diversified investment portfolio, which acts as a hedge against volatility and provides stable higher returns over the long term.

Direct Ownership: AIFs provide direct ownership or stake in the early-stage venture, startups, and private equity, providing potential control over the business operations and helping the business to grow in a specific direction.

Tax Benefits: As most investments are held for at least three years, AIF unit holders can get tax benefits in the form of indexation if invested in debt securities, and if equity assets are held for more than 12 months, the AIF holder can enjoy long-term capital gains tax.

Why are AIFs Becoming Popular in India?

Of all the three categories, Category II AIFs are a massive draw among investors, attracting close to ₹5.61 lakh crores of investment out of ₹6.94 lakh crores as of June 2022.

Alternate Investment Funds provide HNIs and Ultra-HNIs an opportunity to diversify their investment portfolio and maximize risk-adjusted returns by investing in private markets and flexible investment strategy.

India received the highest-ever FDI in recent years, resulting in an upbeat investment mood across sectors. Despite the funding winter in 2022, startupsups turned unicorn, compared to 46 in 2021. And India has emerged as the third-largest startup ecosystems after the United States and China, providing substantial growth opportunities for AIF investors.

Also, with amendments in AIF regulations by SEBI, impetus to high-priority sectors, the introduction of new category fund- special situation funds, and the reconstitution of alternative investment policy advisory committee by SEBI, the AIF industry is witnessing increased attraction from investors.

Top Alternative Investment Funds in India

The number of AIFs has increased steadily since its introduction in 2012. As of the financial year 2022, the number of AIFs registered with SEBI stands at 885 and has gone up further by the end of 2022.

Some of the top AIF schemes in India that made investors richer include Monarch AIF- MNCL Capital Compounder Fund, Nippon’s India Financial Services Scheme- 2, and Ampersand Capital Trust’s Growth Opportunities Fund, according to an Economic Times report.


AIFs are emerging investment opportunities for HNIs and UHNIs looking to deploy surplus funds and earn a higher return on their investment. It’s different from investing in PMS and mutual fund investments and requires specialized knowledge and expertise, as AIF invests in the private market, which may become illiquid at times during challenging market conditions.

AIF investing should be done after understanding the nitty-gritty of the fund and after detailed consulting with an experienced financial advisor.


What are Alternative Investment Funds (AIFs)?

AIFs are pooled funds from HNIs and Ultra-HNIs that invest in unlisted companies, early-stage ventures, starstartupse-IPO stage companies, etc. AIFs include VC funds, angel funds, hedge funds, private equity funds, SME funds, special situation funds, etc.

Who can invest in AIFs?

In the Union Budget 2016, the government allowed foreign nationals and entities to invest in AIFs in India, along with resident Indians, NRIs, PIO, and OCI. The minimum investment amount in AIF is  ₹ 1 crore.

What are the benefits of AIFs?

It helps investors to diversify their investment portfolios, maximize risk-adjusted returns, low volatility in investments as they are not listed, tax benefits, and direct ownership of assets.

Read more:  How Long-term investing helps create life-changing wealth – TOI.

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