Top AIF Schemes

1. What are alternative investment funds?

Alternative Investment Funds (AIFs) are privately pooled investment vehicles that collect capital from selected investors to invest in non-traditional assets like private equity, venture capital, real estate, or hedge strategies. SEBI regulates them under the AIF Regulations, 2012, and they are structured as trusts, companies, or LLPs.

AIFs are primarily meant for high-net-worth individuals and institutional investors, with a minimum investment requirement of Rs.1 cr. Unlike mutual funds, they do not invest in conventional instruments and are not open to retail investors. These funds offer portfolio diversification and the potential for higher returns, but come with higher risk and longer lock-in periods.

2. What are the different types of AIFS in India?

Based on their investment strategy and regulatory classification, AIFs in India is divided into three categories: Category I, II, and III. Each category serves a distinct purpose and focuses on different asset classes. The table below outlines the classification along with common examples under each type:

Category I AIF

Category I Alternative Investment Funds aim to channel investments into sectors that support long-term economic growth and social welfare. These typically include early-stage businesses, infrastructure projects, and ventures focused on inclusive development. Because of their developmental role, the government often encourages them through tax benefits, regulatory support, or relaxed investment norms. Investors in Category I AIFs generally take a long-term view and are willing to accept higher risks in exchange for potentially substantial returns.

Category II AIF

Category II Alternative Investment Funds primarily invest in private businesses, debt instruments, and other structured strategies that do not fall under Category I or III. These funds are not focused on early-stage or socially driven sectors, nor do they employ complex leverage or speculative trading. Instead, they offer a middle ground targeting companies with strong fundamentals that require capital for expansion, restructuring, or long-term growth. While these funds don’t receive special regulatory incentives, they can operate flexibly and are subject to standard SEBI compliance. Leverage is not permitted, except for routine operational needs.

Category III AIF

Category III AIFs are designed for investors seeking high returns through complex and actively managed strategies. These funds can use leverage and invest in instruments like derivatives, structured credit, and arbitrage trades. Due to their high-risk nature, they are suitable only for experienced and well-informed investors.

3. What are the benefits of AIF investments?

Solid Returns

What makes AIFs stand out is its ability to go beyond conventional markets. They don’t just invest in publicly listed companies but also explore areas like private equity, venture capital, and niche debt deals. These are segments where the potential for returns is often far greater, especially when the right opportunities are identified early. Unlike typical investment instruments that follow standard benchmarks, AIFs allow fund managers to be more selective and strategic. That flexibility can translate into stronger performance, though not without risk.

Low Volatility

Many investors consider AIFs because they don’t react to every bump in the stock market. Since a large part of their portfolio is often made up of private assets, valuations don’t swing wildly with daily news or short-term investor sentiment. It doesn’t mean they’re completely risk-free, but compared to publicly traded equities, the ride tends to be much smoother. This trait adds value to those seeking a more stable holding in uncertain times. 

Diversification

Diversification isn’t just about owning different stocks. Proper diversification comes when your investments are spread across asset classes that behave differently. AIFs can include private credit, real estate, startup funding, or even special situation strategies all of which tend to move independently from traditional markets. This added layer of variety can make a portfolio more resilient, especially during downturns when public markets are under pressure.

Conclusion

Alternative Investment Funds (AIFs) offer investors in India a unique opportunity to diversify their portfolios with non-traditional assets like private equity and venture capital. While they present the potential for higher returns, they also come with increased risks and longer lock-in periods. Understanding the different AIF categories can help investors align their choices with their financial goals.