Beginner’s Guide to Alternative Investment Funds (AIFs) in India

In recent years, many high-net-worth investors in India have started looking beyond mutual funds and fixed deposits. They want investments that can offer higher returns, access niche strategies, and diversify beyond traditional markets.

One option that has gained traction is the Alternative Investment Fund, or AIF. While AIFs have been around in India since 2012, awareness among retail investors is still low - and they remain largely an advanced investment product.

What is an Alternative Investment Fund (AIF)?

An Alternative Investment Fund is a privately pooled investment vehicle that collects money from investors - Indian or foreign - and invests it according to a defined strategy. AIFs are regulated into three categories by SEBI. AIF Categories Explained.

Unlike mutual funds, AIFs cater to sophisticated investors and can invest in a wide range of assets, including:

• Private equity (investing in unlisted companies)
• Hedge fund–like trading strategies
• Real estate projects
• Debt instruments
• Infrastructure

Regulation: In India, AIFs are regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Alternative Investment Funds) Regulations, 2012.

How AIFs Differ from Mutual Funds & PMS

Here’s a quick look at how AIFs compare to other popular investment vehicles:

Types of AIFs in India - Quick Overview

SEBI classifies AIFs into three broad categories:

Category I:

Invests in start-ups, early-stage ventures, social ventures, infrastructure, or other sectors considered socially/economically desirable.

Category II:

Includes private equity funds, debt funds, and other funds that do not fall under Category I or III and do not use leverage beyond limited purposes.

Category III:

Uses diverse or complex trading strategies, including derivatives, for short-term returns (similar to hedge funds).

AIF Categories explained in detail. Learn More.

Who Can Invest in AIFs?

• Minimum investment size: ₹1 crore (₹25 lakh for employees/directors of the AIF)
• Eligible investors:
• Indian residents
• NRIs
• Foreign nationals and institutions (subject to compliance)
• Investors must meet accredited investor criteria as per SEBI guidelines (net worth/income thresholds).

Why Consider AIFs?

Potential Benefits:

• Access to unique opportunities - such as pre-IPO investments or niche sectors
• Portfolio diversification - assets not directly linked to public markets
• Professional management - strategies run by experienced fund managers
• Customised strategies - focus on specific industries or investment styles

When AIFs Might Not Be Suitable

While AIFs can be attractive for the right investor, they are not for everyone.

They might not be suitable if:

• You have a short investment horizon
• You require high liquidity
• You are uncomfortable with higher-risk or complex investment strategies
• You are not ready for higher fees (AIFs often have performance-based fees)

Summary & Next Steps

AIFs represent the sophisticated end of the Indian investment spectrum. They can play a valuable role in a high-net-worth investor’s portfolio, provided the investor understands the structure, risks, and long-term nature of such commitments.

Once you understand the basics, the next step is learning about the three categories of AIFs and how they differ - Read the AIF Categories Guide →. AIF Categories in India Explained - Category I, II & III

Disclaimer: This article is for educational purposes only and should not be considered investment advice. Please consult a SEBI-registered investment adviser before making any investment decisions.