What is an Alternative Investment Fund (AIF)? Its Types, Categories & Benefits

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If you’ve been in the market for some time, you must have heard the term ‘alternative investment funds’. Alternative investment funds are unique investment vehicles that invest in assets beyond the traditional investment avenues of FDs, equities, and bonds. 

AIFs are popular among more sophisticated and mature investors (typically HNIs) who are willing to take on higher risks for potentially higher rewards. In fact, investments in AIFs have grown with a CAGR of about 30% over the last five years alone, showcasing their growing popularity (source: Hindu Businessline).

But what exactly are AIFs? Are all AIFs the same? And what are the benefits of investing in AIFs? We answer all these questions and more in this article.

What are Alternative Investment Funds (AIFs)?

An alternative investment fund (AIF) is a privately pooled investment fund that collects money from sophisticated domestic and foreign investors to invest in non-traditional, high-risk alternative assets like private equity, venture capital, and hedge funds. 

Typically, investment in AIFs requires a certain amount of market knowledge and a high minimum investment, making them suitable for HNIs. 

AIFs in India are regulated under the SEBI (Alternative Investment Funds) Regulation, 2012. As per these regulations, SEBI allows AIFs to be created as:

• A trust
• Company
• Limited liability partnership (LLP)
• Corporate body

That said, most existing AIFs in India are registered as trusts with SEBI.

Key Characteristics of AIFs

The key characteristics of alternative investment funds (AIFs) are outlined below:

Types and Categories of AIFs in India

SEBI categorises AIFs into 3 broad categories: Category I, II, and III. Each category can be further divided into different types of AIFs based on their investment approaches. 

Let’s understand the categories of AIFs in India properly:

Category I:

This category of AIFs invests in start-ups, early-stage ventures, social ventures, or SMEs. They can also invest in other sectors that are considered socially/economically beneficial by the government or regulators. 

Types of Category I AIFs: 

• Venture Capital Funds: VC funds invest in start-ups or ventures that are still in the early stages and show high growth potential.  
• Social Venture Funds: These AIFs invest in businesses that may have a positive impact on society or the environment, like clean energy companies. 
• SME Funds: These AIFs invest in small and medium enterprises that show growth potential. 
• Infrastructure Funds: Infra AIFs invest in infrastructure projects like railway, port, airport, or bridge development. 

Category II:

According to SEBI, AIFs that don’t fall under Category I and III and don’t take leverage/debt to meet anything other than their day-to-day expenses are classified as Category II AIFs.

Types of Category II AIFs:

• Private Equity Funds: Private equity funds invest in unlisted private companies to help them raise capital before getting listed.

• Debt Funds: Debt AIFs invest in debt and debt securities of unlisted/listed companies as per the objectives of the fund.

• Fund of Funds: FoF AIFs don’t buy stocks and bonds. Instead, they invest in other alternative investment funds.

Category III:

Category III AIFs are those that deploy complex trading approaches. They also use leverage by investing in listed or unlisted derivatives. 

Types of Category III

• Hedge Funds: Hedge funds use various sophisticated investment approaches like short-selling, arbitrage, and margin trading to target maximum return for investors. 

• Private Investment in Public Equity Fund (PIPE): A PIPE fund invests in shares of publicly listed companies through private placements, usually at a discounted price. Companies often turn to PIPE investments when they need to raise capital quickly, especially during periods when their share prices have declined or market conditions make traditional fundraising difficult.

Key Benefits of Investing in AIFs

At this point, most investors might be wondering, ‘Why should I invest in AIFs?’ AIFs offer multiple benefits that make them a popular choice among HNIs. 

Here are some key benefits of investing in alternative investment funds in India:

• Potential for High Return

AIFs in India may generally offer a higher return potential as compared to other investment options like mutual funds. This is because AIFs have access to a broader range of assets and the flexibility to use more sophisticated investment approaches.

However, investors must understand that this higher return potential is accompanied by higher potential risks as well. 

• Diversified Portfolio

AIFs can help HNIs diversify their investment portfolios beyond the traditional stock and bond markets. They allow investors to partake in a broader range of asset classes, like real estate and private equity.

• Professional Management

AIFs, like mutual funds, are managed by professional fund managers who have expert market knowledge. 

• Low Volatility

Alternative investment funds may experience less volatility compared to traditional equity investments. This is because AIFs invest in alternative assets (like distressed debt and private equity) that may have a low correlation to listed shares.

So, Who Should Invest in AIFs?

AIFs may not be suitable for all types of investors. They may be well-suited for HNIs who: 

• Can match the minimum investment limit of Rs. 1 Crore.
• Know the sophisticated investment approaches used by these funds.
• Can take on high risk for potentially high returns (no guarantees).
• Are looking to diversify beyond traditional equity and bond investments.

AIFs may not be the ideal option for:

• Small investors who don’t have the large corpus needed for AIF investments.
• Investors who prefer investing with smaller installments.
• Investors who have a low risk appetite and limited knowledge of leveraging and other sophisticated investment approaches.

AIFs: Sophisticated Investment Approaches for HNIs

Simply put, AIFs are privately pooled investment funds that help mature investors diversify their portfolios. Based on their investment approaches, SEBI classifies AIFs into:

• Category I 
• Category II
• Category III

But since AIFs use sophisticated investment approaches and invest in complex assets like private equity, they are more suited to HNIs. 

If you’re a small investor seeking to diversify your portfolio, you don’t have to rely on AIFs. You can diversify beyond equities with fixed-income options from GoldenPi. Here, you’ll find everything from corporate bonds to fixed deposits to diversify while aligning with your goals and risk profile.

FAQs on What are AIFs

1. What are the risks of investing in AIFs?

Some risks associated with AIFs include:

• Higher minimum investment amount: Investors need to invest at least Rs. 1 Crore into AIFs. This high minimum investment requirement can act as a barrier for many investors.
• Lock-in period: Most AIFs have a lock-in period of 3 years during which investors cannot withdraw their investment. This can compromise liquidity.
• Higher risk: AIFs invest in non-traditional assets like private equity, which may be more volatile and complex than other traditional assets. If the investment approach goes wrong, the possibility of capital loss may be greater.

2. Can I invest in AIFs on a joint basis?

Yes. AIFs allow joint investments with not more than two investors. The combinations allowed include:

• An investor and their spouse
• An investor and their parent
• An investor and their child

3. Can AIFs make overseas investments?

Yes. As per SEBI’s regulations, AIFs can make overseas investments, provided this doesn’t exceed 25% of their investible funds. It should also be within the overall limit of USD 500 million.

4. How many AIFs are there in India in 2026?

India has over 1,700 AIFs registered under SEBI in India, as of 11.03.2026 (source: Hindu Businessline). 

5. Who regulates AIFs in India?

AIFs in India are regulated by SEBI. They operate under SEBI’s regulations, specifically SEBI’s (Alternative Investment Funds) Regulation, 2012.

Disclaimer:

This information is for general information purposes only. GoldenPi makes no guarantee on the accuracy of the data provided here; the information displayed is subject to change and is provided on an as-is basis. Nothing contained herein is intended to or shall be deemed to be investment advice, implied or otherwise. Investments in the securities market are subject to market risks. Read all the offer-related documents carefully before investing.

Bonds or non-convertible debentures (NCDs) are regulated by the Securities and Exchange Board of India and other government authorities. GoldenPi Securities Private Limited is a registered debt broker and acts as a distributor and not as a manufacturer of the product.