Alternative Investment Funds (AIF) pool money from sophisticated private investors. Funds collected are invested according to the investment policy of the AIF. Securities and Exchange Board of India’s mutual fund regulations doesn’t govern AIFs. However, AIF in India has its regulation, Regulation 2 (1) (b) of the Regulation Act, 2012 of SEBI. An AIF in India can be established as a company, Limited Liability Partnership (LLP), corporate body, or trust.

AIFs invest in investments that are not traditional (for example, equities or fixed income). Securities and Exchange Board of India classifies AIFs under three broad categories. Namely, Category I AIF, Category I AIF and Category III AIF. Each of the categories has different investments as per the broad definition of the category. Some of them are private equity, venture capital, hedge fund, and angel fund etc.

The minimum investments and fees for AIFs are higher than conventional investments. It is difficult to value an AIF as the asset classes that they invest in are pretty rare. AIFs are illiquid as these investments are open only to limited investors. The transaction costs for AIFs are lower than traditional investments as the turnover is lower. AIFs don’t share any information relating to the fund publicly. Also, AIFs have less opportunity to advertise to potential investors.

Securities and Exchange Board of India (SEBI) categorises Alternative Investment Funds into three broad categories. Investors can choose to register in any of the following three categories.