Alternative investment fund, commonly called as an AIF, refers to pooled investment funds which invest in venture capital, private equity, hedge funds, managed futures, etc. Simply put, an AIF means an investment which differs from conventional asset classes including stocks, debt securities, etc. An alternative investment fund can be established in the form of a company or a corporate body or a trust or LLP. More often than not, high net worth individuals/ultra-high net worth individuals invest in alternative investment funds. This is because it requires a high investment amount, unlike MFs (mutual funds).
According to Securities and Exchange Board of India (SEBI), AIFs can be divided into 3 categories:
Category I: Under this category, funds which make investment in start-ups, small and medium enterprises (SMEs) and new businesses having significant growth potential are considered. Government promotes investment in such projects since these can have a multiplier effect on economy in terms of economic growth and employment levels. Such funds act as a lifeline to those start-ups which are looking for capital. In this category, fund include venture capital fund, infrastructure fund, angel fund and social venture fund.
Category II: In this category, funds making investments in several equity securities and debt securities are considered. Simply put, those funds which are not included in category I and III by the regulator, are included in category II. No incentive is provided by government on investment in such funds. Private equity (PE) fund, debt fund, fund of funds are the ones included in this category.
Category III: Under this category, funds targeting short-term returns are considered. Individuals managing such funds use complex and diverse trading strategies to meet their goal of short-term capital appreciation. In these funds too, no specific incentive is provided by government on investment. Under category III, hedge fund and private investment in public equity fund are considered.