NISM-Series-X-A: Investment Adviser (Level 1) · Overview of Alternative Investment Funds (AIFs)

Introduction to Alternative Investment Funds under SEBI Regulations

Updated 11 October 2026 · Fact-checked

An Alternative Investment Fund (AIF) is a privately pooled investment vehicle, set up in India as a trust, company, LLP or body corporate and registered with SEBI under the SEBI (AIF) Regulations, 2012. It collects money from investors to invest under a defined policy. It is not covered by other SEBI fund regulations such as mutual funds.

Understand Introduction to Alternative Investment Funds

An Alternative Investment Fund (AIF) is a pooled investment vehicle. Money from several investors is collected and invested under a stated investment policy for their benefit. It must be established or incorporated in India and registered with SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012.

The word "alternative" tells you what AIFs are not. They are not regular mutual funds, and they do not follow the usual listed equity and debt route. They often invest in things like start-ups, private equity, real estate, distressed assets or use complex strategies, including leverage and derivatives in some cases.

The definition also has an exclusion. Funds already covered by other SEBI regulations, such as mutual funds and collective investment schemes, are not AIFs. Certain other vehicles are also outside it, such as family trusts, employee welfare trusts and holding companies. Read the exact wording of the exclusion in your workbook.

AIFs are meant for sophisticated, larger investors. They are privately pooled, so they are not offered to the general public through a public issue. This is the biggest difference from a mutual fund, which is open to all retail investors, with small ticket sizes and strict diversification limits.

For the adviser, the key point is suitability. AIFs carry higher risk, lower liquidity, longer lock-ins and high minimum investment. Before you recommend one, check the client's risk capacity, time horizon and net worth.

Key formulas to remember

Definition of AIF: AIF = privately pooled investment vehicle + established or incorporated in India + registered with SEBI under AIF Regulations, 2012; All three parts matter. A fund that is not registered, or is already covered by another SEBI fund regulation, is not an AIF.
Legal forms allowed: Trust | Company | Limited Liability Partnership (LLP) | Body corporate; Know that an AIF can take these forms. Trust is the most common in practice.
Three categories: Category I, Category II, Category III; Category is named in the registration. Study the details in the topic on categories of AIFs.
AIF vs mutual fund: investor base: AIF: private pooling, sophisticated and high net worth investors | Mutual fund: public offer, all investors; Frequent comparison point in MCQs.
AIF vs PMS: ownership: AIF: investor holds units in a pooled fund | PMS: securities held in the client's own name in a separate account; In PMS the portfolio is individually managed. In an AIF the money is pooled.

How to solve Introduction to Alternative Investment Funds questions

Use this method for any question that asks you to define an AIF or compare it with another product.

1Read the question and mark the keyword: definition, feature, comparison or suitability.
2Recall the three-part definition: privately pooled, set up in India, registered with SEBI under the 2012 Regulations.
3For a comparison, pick the dimension asked: investor base, offer type, pooling, regulation, diversification or liquidity.
4Place each product on that dimension. Mutual fund is public and pooled. PMS is individual and customised. AIF is private and pooled.
5Strike out options with absolute words like always or never unless the rule is truly absolute.
6Check the exclusion rule if an option mentions mutual funds or collective investment schemes as AIFs. They are not AIFs.
7Pick the option that matches both the dimension and the exact wording of the Regulations.

Quickest way: Three-word memory check: Private, Pooled, Registered

When to use it: Use it when a definition or true/false question appears and time is short.

Ask: is the fund privately pooled? If the option says public offer to everyone, reject it.
Ask: is it registered with SEBI under the AIF Regulations? If not, it is not an AIF.
Ask: is it already covered by another SEBI fund regulation, like mutual fund rules? If yes, it is not an AIF.
For AIF vs PMS, ask: pooled or individual account? Pooled means AIF. Individual means PMS.
Choose the option that fits all checks.

Common mistakes in Introduction to Alternative Investment Funds

Treating an AIF as just another type of mutual fund.
Both pool money from many investors, so they look alike.
Fix: Remember that AIFs are privately pooled and regulated by the AIF Regulations, 2012. Mutual funds are regulated separately and are offered to the public.
Thinking an AIF is open to all retail investors with small amounts.
Students carry over mutual fund ideas such as small SIPs.
Fix: Link AIFs with sophisticated, higher net worth investors, high minimum commitments and limited liquidity.
Confusing AIF with PMS because both are for wealthier clients.
Both are seen as premium products.
Fix: AIF is a pooled vehicle. PMS manages a separate portfolio for each client, with securities in the client's name.
Assuming any pooled fund in India is an AIF.
The definition is remembered only as pooled investment vehicle.
Fix: Add the registration and exclusion conditions. Mutual funds and collective investment schemes fall outside the AIF definition.
Assuming AIFs are always high risk or always give higher returns.
The word alternative suggests aggressive strategies.
Fix: Risk and return depend on the category and strategy. Say AIFs can carry higher risk and lower liquidity, not that returns are guaranteed or always higher.

Worked examples

Example 1

Which of the following best describes an Alternative Investment Fund under the SEBI (AIF) Regulations, 2012? (a) A scheme offered to the public by an AMC with a diversified portfolio (b) A privately pooled investment vehicle set up in India and registered with SEBI (c) A portfolio of securities held in the client's own name and managed individually (d) An unregistered pool of funds raised from friends and family

Show the solution

Spot the keyword: definition of AIF.
Recall the definition: privately pooled, established in India, registered with SEBI under the 2012 Regulations.
Option (a) describes a mutual fund, which is a public offer. Reject.
Option (c) describes PMS, where securities are held in the client's name. Reject.
Option (d) mentions no SEBI registration. Reject.
Option (b) matches all parts of the definition.

Answer: (b) A privately pooled investment vehicle set up in India and registered with SEBI.

Example 2

A client with a large investable surplus asks how an AIF differs from a PMS. Which statement is correct? (a) In an AIF the money of investors is pooled, while in a PMS each client's portfolio is managed separately (b) Both are open to the public through a public issue (c) In a PMS the money of all clients is pooled into one fund with common units (d) AIFs are regulated under the Mutual Fund Regulations

Show the solution

Pick the dimension: pooling and ownership.
AIF pools investors' money into one fund and investors hold units or interests in it.
PMS keeps a separate portfolio for each client, with securities held in the client's name.
Option (b) is wrong because AIFs are privately pooled and not offered through a public issue.
Option (c) reverses the PMS feature.
Option (d) is wrong because AIFs have their own 2012 Regulations.

Answer: (a) In an AIF the money is pooled, while in a PMS each client's portfolio is managed separately.

Exam tips

Learn the definition word by word: privately pooled, established in India, registered under the 2012 Regulations. Questions often test one missing element.
For comparison questions, fix one dimension first, such as investor base or pooling, then compare. This removes trap options quickly.
Remember that mutual funds and collective investment schemes are outside the AIF definition.
Do not select options with words like guaranteed or always. AIF returns and risks depend on the strategy.
X-A has negative marking of 25% of the marks of a question. Skip a question only if you cannot narrow the options to two.

Practice questions from Overview of Alternative Investment Funds (AIFs)

Introduction to Alternative Investment Funds in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Introduction to Alternative Investment Funds: frequently asked questions

What is an alternative investment fund as per SEBI?

An AIF is a privately pooled investment vehicle that collects funds from investors to invest under a defined policy. It is set up in India and registered with SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012.

What is the difference between an AIF and a mutual fund?

A mutual fund is offered to the public and regulated under the Mutual Fund Regulations. An AIF is privately pooled, meant for sophisticated investors, and regulated under the AIF Regulations, 2012. AIFs usually have higher minimum commitments and lower liquidity.

What is the difference between an AIF and PMS?

An AIF pools money from many investors in a single fund. In PMS, the portfolio manager manages a separate portfolio for each client, with securities held in the client's name. The two are governed by different SEBI regulations.

Which legal forms can an AIF take?

An AIF can be set up as a trust, a company, a limited liability partnership or a body corporate. Check the workbook for the exact list and the form most commonly used.