Alternative Investment Funds [AIF]: Categories, Benefits, Drawbacks

By : Neha Dhyani

Updated : Jan 6, 2023, 16:22

Alternative Investment Fund (AIF) is a privately managed investment fund collected from domestic or foreign investors in the form of a company, trust, corporate body, or Limited Liability Partnership. Since they are private funds, Alternative Investment Funds are not customarily subject to the jurisdiction of any regulatory body in India.

This special category of investment differs from conventional instruments of investment in many ways, which are discussed in detail here. We have also shared information about the types, benefits, and drawbacks of Alternative Investment Funds here.

Alternative Investment Funds - Meaning

Out of the many available instruments of investment, Alternative Investment Funds are some of the most unconventional ones. Although officially recognized by the Securities and Exchange Board of India, they do not come under the purview of any Indian regulating agency.

Alternative Investment Funds typically refer to funds that are pooled in together by domestic or foreign investors in the form of a company, a trust, a corporate body, etc. There are several types of Alternative Investment Funds, which are discussed in detail below.

AIF Full Form

The full form of AIF is Alternative Investment Funds. These are special funds that differ from any other instruments of investment. The Securities and Exchange Board of India (SEBI) has categorized Alternative Investment Funds into three categories.

In order to invest in AIF, prospective investors will have to fulfil eligibility criteria, according to which, the minimum investment limit is INR 1 crore. We have shared further information about Alternative Investment Funds here.

Alternative Investment Fund - Categories

There are many different types of Alternative Investment Funds and SEBI has categorized them into three categories: Category 1, Category 2, and Category 3. Each of these categories further consists of several AIF types. According to the SEBI (AIF) Regulations, 2012, AIFs must acquire accreditation in one of the following three categories.

  1. Category I- Invests mostly in start-ups, SMEs, and any other industry deemed economically and socially viable by the government. These funds include venture capital funds, social venture funds, angel funds and infrastructure funds.
  2. Category II- These are inclusive of private equity or debt funds, for which the government or any other regulator provides no explicit subsidies or concessions.
  3. Category III- It consists of AIFs such as hedge funds, funds that trade with the intention of making short-term profits, or other open-ended funds for which no explicit benefits and exemptions are provided by the government or any other regulator.

Benefits of Alternative Investment Funds

There are many benefits of investing in privately held AIFs. We have shared the benefits of Alternative Investment Funds here -

  • AIFs could assist in reducing the volatility associated with traditional investment instruments significantly, as their performance is not dependent on the highs and lows of the stock market.
  • Alternative investments could potentially bring significant tax advantages.
  • AIF fund aids in the diversification of market strategies and investment forms.
  • Because of the investment in Alternative Investment Funds, the investor obtains direct ownership.
  • AIFs can be considered passive investments because they do not always necessitate active management and can be managed by teams.

Drawbacks of AIF Investment

Every investment goes through several market upsides and downsides. While Alternative Investment Funds are a lucrative venture, there is a great learning experience associated with comprehending them, according to experts in the field. Here are some of the drawbacks of investing in Alternative Investment Funds -

  • Investors in AIFs must be accredited, i.e. a high net worth individual.
  • AIFs necessitate a significant upfront investment. Therefore small-scale investors cannot afford AIFs.
  • Alternative investment funds are sophisticated, and it is critical to conduct your research before investing in them.
  • Another impediment for investors interested in AIFs is a lack of liquidity. There is a significant period, usually 3-10 years before the initial profit can be taken out.

Alternative Investment Funds - Eligibility

Alternative Investment Funds are open to people who are looking forward to diversifying their investment portfolio. However, in order to invest in AIF, investors must fit the eligibility criteria, which are listed below -

  • Alternative Investment Funds are open to Indian nationals, NRIs, and foreign investors.
  • In the case of AIFs, there is a minimum lock-in period of three years.
  • The minimum investment amount is INR 1 crore for investors. On the other hand, the minimum investment amount for directors and employees is INR 25 lakhs.
  • In case of Alternative Investment Funds, the maximum number of investors is 1000, except for angel funds, for which it is 1049.

Facts on Alternative Investment Fund

  • As defined by the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, AIFs are any privately pooled investment fund (whether from Indian or international sources) in the form of a trust, an enterprise or a body corporate, or an LLP.
  • As a result, the term includes hedge funds, venture capital funds, private equity funds, debt funds, commodity funds, infrastructure funds, and other AIFs.
  • AIF fund doesn't include the funds governed by the Mutual Funds of SEBI Laws, 1996, the Collective Investment Schemes of the SEBI Regulations, 1999, or any other Board regulations governing fund management operations.
  • AIF does not contain any funds that are bound by the laws of the SEBI. AIFs do not include family trusts, employee welfare trusts, or gratuity trusts.

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FAQs on Alternative Investment Funds

Q.1. What are Alternative Investment Funds?

Alternative Investment Funds are alternative instruments of investments which do not fall under the jurisdiction of any regulating body in India. Alternative Investment Funds refer to the pooled-in funds collected together by domestic or foreign investors in the form of a company or corporate body.

Q2. What is the full form of AIF?

AIF full form is Alternative Investment Funds. These are special funds that differ from any other instruments of investment and are unregulated by any Indian body. Alternative Investment Funds have many benefits, such as low volatility, high return, and diversification.

Q.3. What is the minimum amount required to invest in Alternative Investment Funds?

The minimum amount required to invest in Alternative Investment Funds is INR 1 crore for investors. However, for directors, employees, and fund managers, the minimum investment amount for Alternative Investment Funds is INR 25 lakhs.

Q.4. Is there a cap on the number of investors who can participate in an Alternative Investment Funds scheme?

Alternative Investment Funds in all categories, excluding angel funds, can have a maximum of 1000 investors. In the case of angel funds, the number of investors that can participate in an Alternative Investment Fund scheme is 1049.