An Alternative Investment Fund (AIF) is a privately pooled investment vehicle registered with SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012. AIFs collect funds from sophisticated investors, both Indian and foreign, and invest them according to a defined investment policy. AIFs are distinct from mutual funds or other conventional investment vehicles regulated under separate SEBI regulations.
AIFs include vehicles such as private equity funds, venture capital funds, hedge funds, infrastructure funds, real estate funds, and special situation funds.
Who can invest in an AIF
AIFs raise funds from any investor, whether Indian, foreign, or non-resident. Foreign investors must be residents of a country whose securities market regulator is a signatory to the International Organisation of Securities Commissions (IOSCO) Multilateral Memorandum of Understanding (MoU) or to a bilateral MoU with SEBI. Investors must not be residents of a country listed in the Financial Action Task Force (FATF) public statement for anti-money laundering or terrorism financing deficiencies.
The minimum investment amount is ₹1 crore per investor. If you are an Accredited Investor (AI), this minimum investment corpus eligibility rule does not apply to you.
You can also invest jointly with a spouse, parent, or child, with a maximum of two joint investors per investment. Each joint investor must contribute towards the minimum investment amount.
Categories of AIFs
SEBI classifies AIFs into three categories:
-
Category I
includes funds that invest in early-stage or socially or economically desirable sectors. Sub-categories include:
- Venture Capital Funds (including Angel Funds)
- Infrastructure Funds
- Social Venture Funds
- Small and Medium Enterprises (SME) Funds
- Category II includes funds that do not fall under Category I or III and do not employ leverage beyond what SEBI permits. These include private equity funds, debt funds, and funds of funds.
- Category III includes funds that employ complex trading strategies, use leverage through investment in listed or unlisted derivatives, or trade with a view to making short-term returns. Hedge funds fall under this category. Category III AIFs cannot employ leverage beyond 2 times the Net Asset Value (NAV) of the fund.
What an AIF invests in
The investment universe of an AIF depends on its category and the investment policy disclosed in its Private Placement Memorandum (PPM). Generally, AIFs can invest in:
- Listed and unlisted equity and equity-linked instruments
- Venture capital undertakings and start-ups (Category I)
- Debt instruments of unlisted companies (Category II)
- Listed securities, derivatives, and commodity derivatives such as natural gas and crude oil (Category III). Exposure to a single commodity is capped at 10% of investable funds
- Units of other AIFs
- Real estate and infrastructure projects (subject to category restrictions)
- Government and corporate bonds
- Units of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs)
How an AIF is structured
An AIF must be constituted as a trust, a company, or a Limited Liability Partnership (LLP). It cannot invite the public to subscribe to its units. Every scheme under an AIF must raise funds through private placement only.
Each scheme must have a minimum corpus of ₹20 crore. For Angel Funds, the minimum corpus is ₹10 crore.
A close-ended scheme must declare its First Close within 12 months of SEBI recording the PPM. An AIF registered under a particular category cannot change its category after registration without SEBI approval. An AIF typically requires a Sponsor, Investment Manager, Trustee (for trust structures), Compliance Officer, Auditor, Banker, Broker, DP, and Custodian, along with fund administration/accounting and valuation support where applicable.
Accredited Investors
If you qualify as an Accredited Investor (AI), you can access relaxed regulatory requirements, including lower minimum investment thresholds, under the Large Value Fund (LVF) framework.
You qualify as an Accredited Investor if you meet any of the following criteria:
For individuals, Hindu Undivided Families (HUFs), family trusts, and sole proprietorships:
- Annual income of ₹2 crore or more, OR
- Net worth of ₹7.5 crore or more, with at least ₹3.75 crore in financial assets, OR
- Annual income of ₹1 crore or more, combined with a net worth of ₹5 crore or more, with at least ₹2.5 crore in financial assets
For partnership firms: each partner must independently meet the criteria above.
For trusts (other than family trusts) and body corporates: net worth of ₹50 crore or more.
Your primary residence is not counted towards your net worth for the purpose of accreditation.
To obtain accreditation, you must apply to an Accreditation agency, which is a subsidiary of a recognised stock exchange or depository. The accreditation certificate is valid for two or three years, depending on how many financial years you meet the eligibility criteria.
Compliance requirements
As an AIF registered with SEBI, you must:
- File your registration application and all compliance reports through the SEBI Intermediary Portal (siportal.sebi.gov.in)
- File your PPM through a SEBI-registered Merchant Banker before launching any scheme
- Disclose the disciplinary history of the AIF, sponsor, manager, and their directors for the preceding five years in the PPM
- Submit all changes to the PPM to SEBI and inform investors within one month of such changes
- Hold investments in dematerialised form
- Issue units to investors in dematerialised form
- Follow a standardised approach to valuation of the investment portfolio
As an institutional broker,
Zerodha can help you set up a trading account as an AIF.