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

Caselet: Ms. Iyer, a high-net-worth client, invests Rs 2 crore in a Category II AIF. Which of the following is a regulatory restriction on Category II AIFs?

Category II AIFs cannot borrow funds except for meeting day-to-day operational requirements, within limits set by the regulations. They are privately pooled vehicles that do not raise money from the public or use leverage as an investment strategy.

  1. AThey may borrow freely for investment purposes
  2. BThey cannot borrow funds except for meeting day-to-day operational requirements, subject to prescribed limitsCorrect
  3. CThey must invest only in listed securities
  4. DThey can raise funds from the general public through an IPO of units

Explanation

Category II AIFs do not undertake leverage or borrowing other than to meet day-to-day operational requirements, within prescribed limits. They typically invest in unlisted companies, and units cannot be offered to the public via an IPO because AIFs are privately pooled vehicles.

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