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

Mr. Rohan Mehta, 45, is a resident Indian with investable surplus of Rs 5 crore. He asks about a Category III AIF. Which statement about Category III AIFs is correct?

Category III AIFs can be open-ended or closed-ended and may use diverse or complex trading strategies, including permitted leverage. The three-year minimum tenure applies to Category I and II funds, and pass-through taxation is generally not available to Category III, so the other statements are incorrect.

  1. AThey must be closed-ended with a minimum tenure of 3 years
  2. BThey may be open-ended or closed-ended and can employ diverse or complex trading strategies including leverageCorrect
  3. CThey are prohibited from investing in listed securities
  4. DThey receive pass-through tax status as a matter of rule

Explanation

Category III AIFs, such as hedge funds, may be open-ended or closed-ended and use complex strategies, including leverage within limits. The minimum tenure of 3 years applies to Category I and II closed-ended funds. Category III is not barred from listed securities, and it generally does not enjoy pass-through status, which applies to Categories I and II.

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