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NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Collective Investment Vehicles

Alternative Investment Funds (AIFs): Categories and SEBI Regulations

Updated 11 October 2026 · Fact-checked

An Alternative Investment Fund (AIF) is a privately pooled investment vehicle registered with SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012. It has three categories. Category I backs socially or economically desirable sectors. Category II is the residual category with no leverage. Category III uses complex strategies and leverage. The usual minimum investment is ₹1 crore.

Understand Alternative Investment Funds (AIFs)

An Alternative Investment Fund (AIF) pools money from Indian or foreign investors and invests it under a defined investment policy. It is privately pooled. It is not a public offer like a mutual fund. It must be registered with SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012. It can be set up as a trust, a company, an LLP or another body corporate.

SEBI divides AIFs into three categories by what they invest in and how much risk they take.

  • Category I: funds that invest in start-ups, early-stage ventures, social ventures, SMEs, infrastructure and other sectors SEBI considers socially or economically desirable. Examples: venture capital funds (including venture debt funds), SME funds, social venture funds, infrastructure funds and angel funds.
  • Category II: funds that do not fit Category I or III and do not use leverage or borrowing other than to meet day-to-day operational needs. Examples: private equity funds (including PIPE funds), debt funds other than venture debt funds, and funds of funds.
  • Category III: funds that use diverse or complex trading strategies and may use leverage, including through listed or unlisted derivatives. Examples: hedge funds and long-short funds.

Category I and II AIFs must be close-ended. Category III AIFs can be open-ended or close-ended. Category I funds get the most regulatory incentive because their investments serve a wider economic purpose. Category III carries the most market risk.

AIFs are meant for larger, informed investors. The regulations set a minimum investment per investor of ₹1 crore, with lower limits of ₹10 lakh for angel fund investors and ₹25 lakh for employees or directors of the AIF or its manager. This is far higher than the ₹50 lakh minimum for PMS. As a PMS distributor you must know where AIFs sit among collective investment vehicles and who may be offered them.

Key formulas to remember

Minimum investment per investor
₹1 crore
General rule for all AIF categories. Angel funds: ₹10 lakh. Employees or directors of the AIF or its manager: ₹25 lakh.
Minimum corpus of a scheme
₹20 crore
Angel funds need a lower minimum corpus of ₹5 crore.
Maximum investors in a scheme
1,000 investors
Angel funds are limited to 200 investors.
Fund structure
Category I and II = close-ended; Category III = open-ended or close-ended
Category I and II have a minimum tenure of 3 years.
Leverage
Category I: no leverage except limited temporary borrowing; Category II: no leverage except to meet day-to-day operational needs; Category III: leverage permitted
Category I temporary borrowing is capped at 30 days, four occasions in a year and 10% of investible funds.
Concentration limit in one investee company
Category I and II: 25% of investible funds; Category III: 10% of investible funds
Applies to investment in a single investee company.
Manager or sponsor continuing commitment
Category I and II: lesser of 2.5% of corpus or ₹5 crore; Category III: lesser of 5% of corpus or ₹10 crore
Shows the manager has money in the fund alongside investors.

How to solve Alternative Investment Funds (AIFs) questions

Most AIF questions ask you to identify a category, apply a numerical limit or spot a wrong statement. Use this method.

  1. 1Read the question and mark what it is testing: category, structure, leverage, investor limit or minimum investment.
  2. 2If a fund is described, look for the key clue. Start-ups, SMEs, social ventures or infrastructure point to Category I. Private equity or debt funds without leverage point to Category II. Hedge funds, derivatives or leverage point to Category III.
  3. 3If a number is asked, match it to the right item: ₹1 crore for investment, ₹20 crore for corpus, 1,000 for investors, 3 years for tenure.
  4. 4Check for exceptions: angel funds, and employees or directors of the AIF or manager.
  5. 5Check the structure: Category I and II are close-ended. Only Category III can be open-ended.
  6. 6Eliminate options with absolute words such as 'all categories' or 'never' and test them against these rules.
  7. 7Pick the one option that fits all stated conditions.

Quickest way: Clue-word shortcut for AIF categories

When to use it: Use it when a question describes a fund and asks for its category or permitted features.

  1. Social, start-up, SME, infrastructure: Category I.
  2. Private equity or debt, no leverage: Category II.
  3. Hedge, derivatives, leverage, open-ended: Category III.
  4. Any number question: ₹1 crore is the default minimum. Look for angel fund or employee wording before accepting it.

Common mistakes in Alternative Investment Funds (AIFs)

  • Saying all AIFs are close-ended.

    Students remember that AIFs are long-term, private funds.

    Fix: Only Category I and II must be close-ended. Category III may be open-ended or close-ended.

  • Treating Category II as the one allowed to use leverage.

    The middle category is wrongly assumed to sit between no leverage and full leverage.

    Fix: Category II may not borrow except to meet day-to-day operational needs. Leverage is a Category III feature.

  • Confusing the AIF minimum with the PMS minimum.

    Both are high-ticket products and both numbers are in this paper.

    Fix: AIF is ₹1 crore per investor. PMS is ₹50 lakh per client. Check which product the question is about.

  • Forgetting the exceptions to the ₹1 crore minimum.

    Students memorise only the headline figure.

    Fix: Remember the ₹10 lakh minimum for angel fund investors and the ₹25 lakh minimum for employees or directors of the AIF or its manager.

  • Calling AIFs a public offer open to retail investors.

    AIFs are compared with mutual funds, which are public.

    Fix: AIFs are privately pooled vehicles. Units are placed privately through a placement memorandum, not offered to the public.

  • Assuming a Category I fund can freely borrow.

    Students link Category I with growth and assume borrowing is allowed.

    Fix: Category I may borrow only temporarily, for up to 30 days, on no more than four occasions in a year and up to 10% of investible funds.

Worked examples

Example 1

A SEBI-registered fund pools money from investors to invest in early-stage start-ups and SMEs. It does not use leverage. Which category of AIF is it, and must it be close-ended?
A) Category I, close-ended
B) Category II, close-ended
C) Category III, open-ended
D) Category III, close-ended

Show the solution
  1. Identify the clue: investment in start-ups and SMEs.
  2. Start-ups, early-stage ventures and SMEs are the focus of Category I.
  3. Category III is ruled out because it uses complex strategies and leverage, and this fund does not.
  4. Category II is the residual category for funds that do not fit Category I or III, so it does not apply here.
  5. Category I AIFs must be close-ended.

Answer: A) Category I, close-ended

Example 2

An investor who is not an employee or director of the AIF or its manager wants to invest ₹60 lakh in a Category II AIF that is not an angel fund. Is the investment permitted under the minimum investment rule?
A) Yes, because the minimum is ₹25 lakh for all investors
B) Yes, because the minimum is ₹50 lakh
C) No, because the minimum is ₹1 crore
D) No, because Category II needs a minimum of ₹5 crore

Show the solution
  1. Find the rule: the minimum investment per investor in an AIF is ₹1 crore.
  2. Check the exceptions. ₹10 lakh applies only to angel funds, and ₹25 lakh applies only to employees or directors of the AIF or its manager. This investor and this fund fit neither.
  3. Compare: ₹60 lakh is less than ₹1 crore.
  4. The ₹25 lakh figure is not a minimum for all investors, the ₹50 lakh figure belongs to PMS, not AIFs, and ₹5 crore is the minimum corpus for angel funds, so options A, B and D are wrong.

Answer: C) No, because the minimum is ₹1 crore

Exam tips

  • Learn the three categories through their clue words: social or start-up, private equity or debt, hedge or leverage. Most questions reduce to this.
  • Memorise the number set together: ₹1 crore minimum investment, ₹20 crore corpus, 1,000 investors, 3 years tenure. Then learn the angel fund and employee exceptions.
  • Watch for trap options that swap AIF numbers with PMS numbers, such as ₹50 lakh.
  • Check the word 'only' or 'all' in options. Statements like 'all AIFs are close-ended' are usually wrong.
  • The negative marking in this paper is 10% of the marks for a question, so a wrong 1-mark answer costs 0.1 mark. With a penalty this small, an informed guess after eliminating even one option is usually worthwhile.

Practice questions from Collective Investment Vehicles

Alternative Investment Funds (AIFs) in other exams

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

Alternative Investment Funds (AIFs): frequently asked questions

What is the difference between Category I, II and III AIFs?

Category I invests in start-ups, SMEs, social ventures and infrastructure. Category II covers funds such as private equity and debt funds that do not use leverage beyond day-to-day needs. Category III uses complex strategies and may use leverage and derivatives, as hedge funds do.

What is the minimum investment in an AIF in India?

The minimum is ₹1 crore per investor. For angel fund investors it is ₹10 lakh. For employees or directors of the AIF or its manager it is ₹25 lakh.

Which regulations govern AIFs?

AIFs are governed by the SEBI (Alternative Investment Funds) Regulations, 2012. An AIF must be registered with SEBI before it can raise money from investors.

Can a Category III AIF be open-ended?

Yes. Category III AIFs can be open-ended or close-ended. Category I and II AIFs must be close-ended.