Platizio Alternatives
Institutional Intelligence

Alternative Investment Funds

Navigating the complexities of sophisticated capital structures for private equity, hedge funds, and infrastructure vehicles.

At a Glance

How the three categories differ

Structural comparison of SEBI Alternative Investment Fund Categories I, II and III across fund structure, leverage, taxation and manager contribution.
Feature Cat I Cat II Cat III
Fund Structure Close-Ended mandatory Close-Ended mandatory Open / Closed as per PPM
Leverage Not Permitted except short-term borrowing Not Permitted except short-term borrowing Up to 2× NAV Master Circular para 7.2.3
Taxation Pass-Through Sec. 224, IT Act 2025 Pass-Through Sec. 224, IT Act 2025 Fund Level MMR ~42.744%
Skin-in-the-Game 2.5% / ₹5 Cr whichever is lower 2.5% / ₹5 Cr whichever is lower 5% / ₹10 Cr whichever is lower

SEBI (Alternative Investment Funds) Regulations, 2012 as amended 2025; SEBI Master Circular for AIFs. Taxation per Sec. 224, Income-tax Act, 2025; Category III is taxed at fund level at the maximum marginal rate of ~42.744%.

What is an AIF?

An Alternative Investment Fund (AIF) is any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy.

Regulatory Authority

Securities and Exchange Board of India (SEBI)

Fund Categories

01

Category I AIF

Funds which invest in start-ups, early stage ventures, social ventures, SMEs and sectors which the government or regulators consider as socially or economically desirable.

  • Venture Capital Funds
  • Infrastructure Funds
  • Social Venture Funds
  • Angel Funds
  • SME Funds
Learn More
02

Category II AIF

AIFs which do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements.

  • Private Equity Funds
  • Debt Funds
  • Funds for Distressed Assets
  • Real Estate Funds
Learn More
03

Category III AIF

Funds which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.

  • Hedge Funds (Long Short)
  • Long Only Funds
  • Market Neutral Funds
  • Multi-Strategy Funds
Learn More

The AIF Lifecycle

Understanding the sequential journey of an alternative investment vehicle from inception to terminal distribution.

01

Formation

Trust deed execution and SEBI registration process.

02

Fundraising

Marketing to sophisticated investors and capital commitment.

03

Deployment

Capital calls and execution of investment strategies.

04

Management

Portfolio monitoring and active value creation.

05

Exit

Realization of gains and final capital distribution.

Investment Vehicle Comparison

Contrast AIF features against traditional investment avenues to determine the optimal structure for your objective.

Full Comparison
Feature AIF (Alternative) Mutual Funds PMS
Min Investment ₹1 Crore ₹500 ₹50 Lakhs
Max Investors 1000 per scheme Unlimited Unlimited
Portfolio Concentrated / Unlisted Diversified / Listed Concentrated / Listed
Leverage Allowed (Cat III) Not Allowed Not Allowed
Regulation SEBI AIF Regs SEBI MF Regs SEBI PMS Regs

Frequently Asked Questions

Critical inquiries regarding regulatory compliance, taxation, and operational parameters of AIFs.

Who can invest in an AIF?
AIFs are intended for sophisticated investors, including Resident Indians, NRIs, and foreign nationals. Institutional investors like banks, pension funds, and insurance companies also participate. The primary requirement is a minimum investment of ₹1 Crore (₹25 Lakhs for employees/directors of the Manager).

What is the taxation structure for AIFs?
Category I and II AIFs enjoy "Pass-Through" status, where income (other than business income) is taxed at the investor level. Category III AIFs are taxed at the fund level as a Determinate Trust at the Maximum Marginal Rate (MMR).

What is the tenure of an AIF?
Category I and II AIFs are close-ended with a minimum tenure of 3 years. Category III AIFs can be either open-ended or close-ended. Extensions are possible with 2/3rd majority approval of investors.

What is SEBI's role in regulating AIFs?
SEBI (Securities and Exchange Board of India) is the primary regulatory authority for AIFs in India. All AIFs must be registered with SEBI before commencing operations. SEBI prescribes eligibility criteria, investment conditions, and ongoing compliance requirements.

What is the minimum investment in an AIF?
The minimum commitment is ₹1 Crore per investor for a general AIF, reduced to ₹25 Lakhs for employees and directors of the Manager. A scheme must also reach a minimum corpus of ₹20 Crore, and Angel Funds are exempt from that corpus floor.

How many investors can an AIF scheme have?
A scheme is capped at 1,000 investors across all categories except Angel Funds. The Manager must also maintain skin in the game — 2.5% of the corpus or ₹5 Crore for Categories I and II, and 5% or ₹10 Crore for Category III, whichever is lower.