AIF (Alternative Investment Fund)
An Alternative Investment Fund (AIF) is a privately pooled investment fund registered with SEBI that invests in assets or strategies outside traditional mutual funds, such as venture capital, private equity, private credit, real estate and hedge fund strategies. AIFs are meant for sophisticated investors and need a minimum investment of ₹1 crore.
AIFs are governed by the SEBI (Alternative Investment Funds) Regulations, 2012, and are divided into three categories based on what they invest in and how much risk and leverage they can take. Rules on this page are as of October 2026.
The three AIF categories
Invests in start-ups, early-stage ventures, SMEs, social ventures and infrastructure, sectors the government considers economically desirable. Includes venture capital funds, angel funds, SME funds, social venture funds and infrastructure funds. Close-ended, with a minimum tenure of three years.
Funds that do not fall into Category I or III and do not use leverage except for limited day-to-day needs. Includes private equity funds, private credit and debt funds, real estate funds and funds of funds. Close-ended, with a minimum tenure of three years. This is the largest category by committed capital.
Uses complex trading strategies in listed markets and may use leverage, including through derivatives. Includes long-only and long-short equity funds, hedge funds and PIPE (private investment in public equity) funds. Can be open-ended or close-ended.
Key AIF rules at a glance
| Feature | Rule |
|---|---|
| Regulator | SEBI, under the AIF Regulations, 2012 |
| Minimum investment | ₹1 crore per investor (lower for the fund's own employees and directors). Accredited investors have more flexibility under certain structures |
| Minimum fund size | ₹20 crore per scheme |
| Maximum investors | Up to 1,000 per scheme, with exceptions for certain structures |
| Tenure | Category I and II: close-ended, minimum 3 years. Category III: open-ended or close-ended |
| Leverage | Category I and II: only limited temporary borrowing. Category III: permitted within SEBI limits |
| Offer document | Private placement memorandum (PPM), not a public offer |
SEBI updates AIF rules regularly. Check the latest regulations and the fund's PPM before investing.
How AIFs are taxed
| Category | Tax treatment |
|---|---|
| Category I and II | Pass-through under Section 115UB for income other than business income. The fund does not pay tax on it; investors pay tax on their share, as if they had earned the income directly |
| Category III | No pass-through status. Income is generally taxed at the fund level, often at the maximum marginal rate, which can create a significant tax drag |
Tax treatment can change materially with each Finance Act, so read the fund's tax note and speak to a tax adviser before investing. Read more in our guide to AIF taxation in India.
AIF vs PMS vs SIF vs mutual fund
| Mutual fund | SIF | PMS | AIF | |
|---|---|---|---|---|
| Minimum investment | As low as ₹100 to ₹500 | ₹10 lakh | ₹50 lakh | ₹1 crore |
| What it invests in | Mainly listed securities | Listed securities with limited shorts | Mainly listed equities | Unlisted companies, private credit, real estate, hedge strategies |
| Structure | Pooled | Pooled | Individual portfolio in your demat account | Pooled |
| Liquidity | Usually daily | Daily to periodic | Varies by provider | Category I and II locked in for years; Category III varies |
| Typical fees | Expense ratio | Expense ratio | Fixed and/or performance fee | Management fee, often plus a performance fee or carry |
Beyond listed markets
Gives access to private equity, venture capital, private credit and hedge strategies.
₹1 crore minimum
Designed for high-net-worth and sophisticated investors.
Long lock-ins
Category I and II funds often take 5 to 10 years or more to return capital.
Who should consider an AIF
- High-net-worth investors with a well-built core portfolio who want a small allocation to private markets or specialised strategies.
- Investors who can lock in money for many years without needing it, especially for Category I and II funds.
- Those who can evaluate the fund manager's track record, fees and strategy, since outcomes vary much more across AIFs than across mutual funds.
- AIFs are illiquid, complex and higher-risk. They should be sized carefully within your overall asset allocation, ideally with guidance from a wealth manager.
Frequently asked questions
What is the minimum investment in an AIF?
The minimum investment is ₹1 crore per investor. A lower minimum applies to the fund's own employees and directors, and accredited investors have more flexibility under certain structures.
What is the difference between Category I, II and III AIFs?
Category I invests in start-ups, SMEs, social ventures and infrastructure. Category II covers private equity, private credit and real estate funds and cannot use leverage beyond limited temporary borrowing. Category III uses trading strategies in listed markets, such as long-short and hedge strategies, and can use leverage.
Is an AIF better than a PMS?
Neither is better in general. A PMS holds mostly listed stocks directly in your demat account with a ₹50 lakh minimum. An AIF is a pooled fund with a ₹1 crore minimum that can also invest in unlisted assets. The right choice depends on your goals, liquidity needs, tax position and the specific manager.
How are AIF returns taxed?
Category I and II AIFs are pass-through for income other than business income, so investors are taxed on their share of income. Category III AIFs are generally taxed at the fund level. Tax rules change with each Finance Act, so check the latest position before investing.
Can I exit an AIF early?
Usually not easily. Category I and II AIFs are close-ended with multi-year terms, and capital is returned as investments are sold. Some Category III AIFs are open-ended and allow periodic redemptions.