Do Not Call
.webp "What Is Alternative Investment Funds Aifs")
As Indian investors seek diversification and access to unconventional opportunities, Alternate Investment Funds (AIFs) have gained popularity. These privately pooled investment vehicles cater to high-net-worth individuals (HNIs) and institutional investors, offering access to assets like private equity, venture capital, real estate, hedge funds, and more. Regulated by the Securities and Exchange Board of India (SEBI), AIFs enable portfolio diversification but come with unique structures, strategies, and risks. This article explores what AIFs are, their types, benefits, eligibility, and key considerations for investors.
AIFs are privately pooled investment vehicles that collect funds from investors to invest according to a defined investment policy.
They differ from mutual funds in terms of strategy, asset class, regulatory framework, and investor profile.
AIFs are regulated under SEBI (AIF) Regulations, 2012, and are typically not open to retail investors due to their complexity and higher risk appetite.
Here are the key features that define how Alternative Investment Funds (AIFs) function and who they are suited for:
Feature |
Description |
|---|---|
Minimum Investment |
₹1 Cr per investor (₹25 Lakh for employees/directors) |
Investor Base |
High-net-worth and institutional investors |
Regulation |
SEBI (AIF) Regulations, 2012 |
Liquidity |
Illiquid (closed-end structure; fixed tenure) |
Fund Structure |
Typically set up as a trust or company |
Transparency |
Regular disclosures mandated by SEBI |
SEBI classifies AIFs into three categories, each with distinct investment objectives and risk profiles.
These funds invest in socially or economically desirable sectors and are encouraged by regulators.
Examples:
Startups
Early-stage ventures
Social ventures
SMEs (Small and Medium Enterprises)
Infrastructure funds
They typically attract government or regulatory incentives and have longer horizons.
These do not receive incentives or leverage but follow complex strategies beyond traditional investments.
Examples:
Private equity funds
Debt funds
Fund of funds (FoFs)
Distressed asset funds
These are the most popular AIFs in India, especially for investors seeking medium to long-term growth.
These employ diverse or complex trading strategies and may invest in listed or unlisted derivatives for short-term returns.
Examples:
Hedge funds
Long-short funds
Arbitrage funds
They can use leverage and are subject to tighter scrutiny due to higher risk exposure.
To understand how AIFs function, it’s important to know the roles of the key entities involved in their structure:
Designs investment strategy and manages the fund.
Holds the fund’s assets and ensures regulatory compliance.
Sets up the fund and contributes at least 2.5% of the fund corpus or ₹5 Cr, whichever is lower.
Minimum investment of ₹1 Cr per person. Usually HNIs, family offices, or institutions.
Funds operate as close-ended structures with tenures ranging from 3 to 10 years, extendable by mutual consent.
These advantages make AIFs an appealing option for sophisticated investors looking beyond traditional stocks and bonds.
Access to non-traditional assets like private equity, real estate, or commodities that may not correlate with public markets.
Each AIF has its own tailored strategy targeting specific outcomes—growth, income, or alpha generation.
Run by experienced fund managers and supported by research teams and legal advisors.
Certain AIFs (particularly Category I and II) offer pass-through taxation, where tax is applicable only at investor level, avoiding double taxation.
Investors can gain exposure to high-growth businesses before they go public.
Investors must carefully assess the fund’s objective, strategy, team, and fees before committing capital.
Risk Type |
Explanation |
|---|---|
Illiquidity |
Lock-in periods make it difficult to redeem before maturity |
High Minimum Investment |
Entry barrier of ₹1 Cr may restrict access |
Regulatory Risks |
Changes in SEBI guidelines can impact fund operation |
Managerial Risk |
Performance heavily depends on fund manager’s expertise |
Valuation Transparency |
Assets like startups or distressed debt may lack clear value |
AIFs are not meant for short-term goals or capital safety, unlike many mutual fund schemes. Here’s how they differ:
Feature |
AIFs |
Mutual Funds |
|---|---|---|
Investor Base |
Accredited or HNIs |
Open to retail investors |
Investment Style |
Unconventional assets and strategies |
Primarily equity, debt, or hybrid |
Liquidity |
Illiquid (tenure-bound) |
Liquid (open-ended or closed-ended) |
Regulation |
SEBI AIF Regulations |
SEBI Mutual Fund Regulations |
Transparency |
Periodic NAV and updates |
Daily NAV and high disclosure |
Entry Threshold |
₹1 Cr minimum |
₹500–₹5,000 depending on scheme |
Tax implications depend on fund structure, asset class, and holding period.
Category I & II:
Pass-through status; investors pay tax as per their income slab on gains.
Category III:
Taxed at the fund level. Capital gains and business income are taxed according to applicable rates, often making them less tax-efficient.
AIFs cater to a niche audience—those seeking differentiated returns through alternative asset classes. Let’s explore who they’re best suited for.
Investors with a long-term horizon and high-risk tolerance
Those looking to diversify beyond listed equities and fixed income
Investors seeking exposure to startups, real estate, or structured credit
Family offices and institutions managing large portfolios
These products are not designed for new or conservative investors.
Before proceeding, it’s important to evaluate whether an AIF aligns with your financial goals, risk tolerance, and investment horizon.
Ensure the fund is listed in SEBI’s list of registered AIFs.
Review the offering memorandum and risk disclosures.
Minimum investment of ₹1 Cr; Know Your Customer (KYC) compliance mandatory.
Most AIFs are distributed through private wealth managers or financial institutions.
Includes management fee (typically 1.5–2.5%) and performance fee (profit-sharing).
Alternate Investment Funds offer unique opportunities for portfolio diversification and potential outperformance, especially in niche and high-growth sectors. However, their complex structure, long lock-ins, and higher risk make them suitable for experienced investors only. A well-researched approach, along with professional advice, is essential before committing capital to an AIF.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
.jpeg)
28982
Navigate the tax maze with ease! Uncover Income Tax 101, demystify jargon with Terms for Beginners, and choose between Old or New Regimes.
52719
Unlock the world of credit! From picking the perfect card to savvy loan management, navigate wisely.
31821
Money Management and Financial Planning covers personal finance basics, setting goals, budgeting...
14391
Explore the investment cosmos! From beginner's guides to sharp-witted strategies, explore India's treasure trove of options.
3186
Discover essential insights on various types of insurance in India.
4307
Welcome to Tech in Finance, where we explore the exciting intersection of technology and finance...
.webp "Download"){kind=icon}
.jpeg "image not found")
