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Alternative Investment Fund (AIF): Meaning, Types and Benefits

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Last Updated on Apr 29, 2025 by vanessa sequeira

Alternative Investment Fund (AIF) is a type of fund of funds that invests in asset classes other than bonds, stocks, and cash. It pools funds from investors and invests them under different categories of investments as specified by SEBI for the benefit of investors. For investors seeking alternative investment opportunities beyond conventional instruments, AIFs present a compelling choice.

AIF consists of privately pooled investment funds that invest in private equity, venture capital, hedge funds, and managed funds. AIF differs from conventional investments such as debt securities and stocks and is an option for high-net-worth individuals, including domestic investors and institutions. Investing in AIFs can offer exposure to high-growth and niche sectors. In this article, we dive deeper into the meaning of AIF and its various categories.

What are Alternative Investment Funds (AIFs)

AIF is defined under Regulation 2(1)(b) of the SEBI (Alternative Investment Funds) Regulations, 2012 (“Regulations”). The regulations explain AIF as a fund established or incorporated in India in the form of a Limited Liability Partnership (LLP), company, trust, or body corporate.


Alternative Investment Funds (AIFs) are private pooled investment vehicles that collect funds from sophisticated investors, such as high-net-worth individuals (HNWIs), family offices, and institutions. These funds focus on investing in non-traditional assets or strategies, typically outside the scope of stocks, bonds, and cash. They offer access to alternative investment opportunities such as private equity funds, hedge funds, real estate, and more.

Categories of Alternative Investment Fund

Applicants can seek registration as an AIF in the following categories as may be applicable.

Category I AIFs

Category I AIFs are those that primarily invest in sectors or assets that are expected to generate positive economic or social outcomes. These funds are often seen as promoting economic development or contributing to society in a meaningful way. They are relatively low-risk and focus on sustainable growth.

  • Infrastructure Funds: These funds invest in infrastructure projects like roads, airports, power plants, and other public utilities. They play a crucial role in the development of physical assets and public services.
  • Social Venture Funds: These funds focus on supporting social enterprises or businesses that have a positive impact on society, such as clean energy startups or healthcare projects aimed at underserved populations.
  • Start-up Funds: These AIF types invest in early-stage or emerging companies with high growth potential. They provide funding to start-ups in various sectors such as technology, healthcare, and finance, helping them scale.

Category II AIFs

Category II AIFs invest in more established assets and have a moderate risk profile. They generally do not use leverage but can focus on investments in industries like real estate, private equity, and other established sectors.

  • Private Equity Funds: These funds invest in private, unlisted companies with the goal of enhancing their value over time, often through active involvement in their management. Private equity AIFs focus on capital growth and may exit via a sale or IPO.
  • Debt Funds: These funds invest in fixed-income instruments, such as bonds or loans, provided to companies or projects. They aim to generate consistent income while maintaining capital safety.
  • Real Estate Funds: These alternative funds focus on property investments, including residential, commercial, and industrial real estate. Real estate AIFs aim to generate returns from both rental income and capital appreciation.

Category III AIFs

Category III AIFs employ more aggressive strategies, including the use of leverage, short-selling, and other techniques aimed at generating high returns. These funds are higher risk and typically seek to capitalise on market inefficiencies or short-term opportunities.

  • Hedge Funds: Hedge funds as AIFs use a range of complex strategies like arbitrage, long/short equity, and derivatives to generate returns. They typically target higher returns in shorter timeframes and may invest across asset classes.
  • Short-Term Funds: These funds aim to take advantage of short-term market movements, using strategies like leverage and trading on volatility. They are designed for sophisticated investors willing to bear the risk associated with rapid market changes.
  • Distressed Asset Funds: These funds invest in assets that are undervalued due to financial distress or market inefficiencies. They typically seek to restructure the assets or companies in which they invest for a higher return when market conditions improve.

Benefits of Investing in Alternative Investment Funds

  1. High Return Potential
    AIFs, especially in categories like private equity and hedge funds, can offer substantial returns. High-return AIFs typically target high-growth opportunities that traditional investments might overlook.
  2. Diversification
    Investing in AIFs enables exposure to a broad spectrum of assets beyond the stock market, such as real estate, commodities, and unlisted companies. AIFs for diversification help reduce overall portfolio risk.
  3. Risk Mitigation
    Many AIFs use sophisticated AIF risk management strategies such as hedging to manage risks. They are ideal for investors seeking risk-adjusted returns rather than just capital appreciation.
  4. Access to Exclusive Investment Opportunities
    AIF investments often involve opportunities in early-stage companies, emerging markets, and unique industries.
  5. Long-Term Growth
    AIFs for long-term wealth building can be a strategic choice for investors who have the patience and risk appetite to invest beyond traditional equities and bonds.

Who Can Invest in Alternative Investment Funds?

AIFs are generally reserved for high-net-worth individuals (HNWIs), institutional investors, and sophisticated investors who can bear the higher risks associated with these funds. AIFs for high-net-worth individuals often require higher minimum investments, making them less accessible to retail investors.

Choosing the best alternative investment funds and top AIF funds for growth involves understanding one’s investment objectives, risk appetite, and the expected alternative investment fund performance.

Eligibility criteria for alternative investment fund registration

The eligibility criteria for applying for registration as Alternative Investment Fund are:

  • The applicant, manager, and sponsor are fit and proper persons as per the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008.
  • The manager of the key investment team of AIF has:
    1. Adequate experience and at least 1 key personnel having 5 yrs of experience in managing pools of capital or advising, in the fund, wealth, asset, portfolio management or in the business of selling, buying, and dealing of securities or other financial assets 
    2. At least 1 key personnel having professional qualification in accountancy, finance, commerce, business management, capital market, economics, or banking from an institution or university recognized by the Central Government or any State Government. 
  • The applicant at the time of registration has specifically stated the targeted investors, investment objective, investment style, proposed corpus, strategy, and proposed tenure of the fund or scheme.
  • The Memorandum of Association (MoA) of a company or the Trust Deed of a Trust or the Partnership deed of an LLP permits to carry on the activity of AIF.
  • The applicant should be prohibited by its MoA and Articles of Association (AoA) or Partnership Deed or Trust Deed to make an invitation to the public for subscribing to its securities. 
  • If the applicant is a Trust, the Trust Deed is duly registered under the Registration Act, 1908.
  • If the applicant is an LLP, it is duly incorporated, and the partnership deed is filed with the Registrar of Firms as per the provisions of the Limited Liability Partnership Act, 2008. 
  • In case an applicant is a body corporate, it is established or set up under the laws of the Central or State Legislature, and it has permission to carry on the activities of AIF.

Registration of Alternate Investment Fund

  • The application for grant of AIF Registration Certificate can be made to the SEBI for Categories I, II, and III AIF in Form A as stated in the First Schedule of the Regulations along with the necessary documents. 
  • The registration application should be accompanied by a non-refundable application fee as stated in Part A and paid in the manner stated in Part B of the Second Schedule of the Regulations. 
  • The SEBI will take into account the requirements specified in the Regulations before considering the grant of Registration Certificate to the applicant. 
  • Generally, after receipt of the registration application, the applicant receives a reply from the SEBI within 21 working days. However, the time taken for granting registration depends on how quickly the requirements are adhered to by the applicant. 
  • The applicant must state in the covering letter of the application whether:
    1. It is registered with the SEBI as a Venture Capital Fund. If the answer is yes, the details must be provided. 
    2. The applicant has been undertaking the activities of AIF before applying for registration. If the answer is yes, the details must be provided. 
    3. The applicant is applying for the registration of a new fund. 
  • The applicant should also file an online application in terms of the SEBI guidelines from time to time.

To Wrap it Up

Alternative Investment Funds offer tailored investment options with the potential for higher returns, diversification, and access to unique sectors. However, it is important for investors to assess AIF tax benefits, eligibility, regulatory framework, and their own risk tolerance.

While top AIF funds can deliver significant returns, they also carry a higher level of risk compared to traditional investments. Thus, AIF investments are best suited for informed, high-net-worth investors seeking alternative investment opportunities with a strategic approach to wealth growth. By carefully evaluating AIF investment strategies, AIF types, and aligning them with financial goals, investors can make the most of the opportunities that alternative funds present.


Aradhana Gotur
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