An AIF is a privately pooled vehicle established in India as a trust, company, LLP or body corporate, investing under a defined investment policy, and not regulated as a mutual fund or collective investment scheme. The category determines four things that recur in monthly work:
- Whether the fund may be open ended, and the minimum tenure
- Whether it may borrow, and within which three limits
- The maximum exposure to a single investee company
- The continuing interest the Sponsor or Manager must maintain
What the definition says #
The paraphrases in circulation lose a feature of the definition that matters. An AIF is defined partly by what it is not.
"any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which, (i) is a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors; and (ii) is not covered under the Mutual Funds Regulations, 1996, the Collective Investment Schemes Regulations, 1999 or any other regulations of the Board to regulate fund management activities."
Reg 2(1)(b)
- Privately pooled. Not offered to the public. Hence a placement memorandum rather than a prospectus, and a capped investor count.
- Defined investment policy. Not marketing material. Whether a particular investment was permitted is determined by this document.
- For the benefit of its investors. The fiduciary basis from which maker-checker controls and audit trails derive.
- Not covered under any other Board regulation. The negative limb, and the source of the divergence described below.
Is an AIF the same as private equity or a hedge fund? #
AIFs are commonly described as private equity, venture capital and hedge funds. That describes what AIFs predominantly do, not what one is.
The regulation describes a container, not a strategy. Regulation 2(1)(b) makes no reference to equity, debt or any investment approach. A mid-market lender, a listed-equity fund using derivatives and a seed-stage investor are all AIFs, and the operational work on each bears little resemblance to the others. "Alternative" denotes the regulatory classification rather than the asset.
What the three categories are #
Registration is by category, and for Category I by sub-category as well. In practice:
- Category I. Venture capital, SME, angel, social impact, infrastructure and special situation funds. These six are named in Reg 3(4)(a) and are the only sub-categories a registration certificate will show.
three moved recently
Special situation funds were added January 2022. Social impact funds replaced "social venture funds" in July 2022. Angel funds were written into the list in September 2025, and their own rules have changed more than once since. Treat any note older than a year as unverified. - Category II. Growth and buyout private equity, venture debt, structured credit, real-estate credit, pre-IPO, and most funds of funds. A fund that does not fall clearly into I or III is registered here.
- Category III. Long-short equity, listed-equity absolute return, multi-strategy, and funds trading derivatives for short-term returns.
Only the Category I sub-categories are drawn from the regulation. The remainder are market descriptions.
Category I vs II vs III: tenure, leverage and concentration limits #
| Category I | Category II | Category III | |
|---|---|---|---|
| Open or close ended | Close ended, always | Close ended, always | Either. Schemes may be open or close ended |
| Minimum tenure | 3 years | 3 years | None for an open-ended scheme |
| Borrowing and leverage | None to invest. Exception for day-to-day needs: ≤30 days, ≤4 a year, ≤10% of investable funds wording changed 2024Before 7 August 2024 the clause read "temporary funding requirements". It now reads "temporary funding requirements and day-to-day operational requirements", which widens what the exception covers. The three limits did not move. | Same exception, same three limits | Permitted, with investor consent, inside a Board-specified cap. Leverage disclosed periodically |
| Hedging | Permitted, including credit default swaps | Permitted on specified conditions | Part of the strategy permission itself |
| Tax hook in the regulation | Trusts and companies construed as "venture capital company" or "venture capital fund" under s.10(23FB), Income-tax Act, 1961 | None stated | None stated |
| Category I | Category II | Category III | |
|---|---|---|---|
| One investee company | 25% of investable funds 50% for a large value fund | 25% of investable funds 50% for a large value fund | 10%; 20% for a large value fund. Listed equity may use investable funds or scheme NAV |
| Sponsor or Manager continuing interest | 2.5% of corpus or ₹5 crore, lower | 2.5% of corpus or ₹5 crore, lower | 5% of corpus or ₹10 crore, lower |
| Scheme corpus floor | ₹20 crore per scheme · ₹5 crore for a social impact fund scheme | ||
| Minimum investment | ₹1 crore · ₹25 lakh for employees and directors · does not apply to an accredited investor | ||
| Investors per scheme | 1,000 · accredited investors excluded from the count | ||
Two defined terms carry much of the weight in those tables. Corpus is the amount investors have committed by contract, not the amount paid in. Investable funds is corpus less an expense estimate made once for the whole tenure. Both are treated in full, with the arithmetic, in Commitment, drawn and uncalled.
Two conditions that modify the limits #
- Large value fund for accredited investors Reg 2(1)(pa)
- Every investor other than the Manager, Sponsor and their employees and directors is an accredited investor and invests at least ₹25 crore. It is a condition rather than a category, and it alters the concentration limit in both tables.
The exclusion is express, so a waiver of fees does not satisfy the requirement.
Common errors #
Category II has no positive definition
It is defined as a fund that "does not fall in Category I and III". The largest category by assets is a residual, and the classification therefore supports no inference about strategy.
Treating the scheme and the fund as the same unit
The corpus floor, the investor cap and the concentration denominator all apply at scheme level. A fund that appears compliant in aggregate may hold a scheme that was never permitted to launch.
Applying Regulation 10 to an angel fund
Regulation 19B(2) disapplies clauses (a) to (d) and (f) for angel funds, removing the corpus floor, the ₹1 crore minimum, the continuing interest and the investor cap. Chapter III-A governs instead.
Equating Category III with hedge funds
The distinguishing features in the regulation are complex trading strategies and permission to employ leverage. The reference to hedge funds in the Explanation is illustrative rather than definitional.
Common questions #
What is the minimum investment in an AIF?
₹1 crore under Regulation 10(c), falling to ₹25 lakh for employees and directors of the AIF or its Manager, and not applying to an accredited investor. A social impact fund investing only in not-for-profit securities on a social stock exchange has a ₹1,000 floor. amended Apr 2026
That ₹1,000 floor replaced ₹2 lakh on 18 April 2026. Material written before that date states the earlier figure.
Can a scheme have more than 1,000 investors?
Yes. Regulation 10(f) caps a scheme at one thousand investors, but accredited investors are excluded from that count. The figure required is therefore rarely a simple count of investor records.
Can a Category II AIF borrow?
Not for the purpose of making investments. Borrowing is permitted only for temporary funding and day-to-day operational requirements, for not more than thirty days, on not more than four occasions in a year, and not more than ten per cent of investable funds. All three limits apply simultaneously.
Which categories are close ended?
Category I and II, always, with a minimum tenure of three years (Reg 13). Category III schemes may be open or close ended.
Is an AIF the same as a mutual fund?
No. Regulation 2(1)(b)(ii) excludes anything covered by the Mutual Funds Regulations, 1996 or the Collective Investment Schemes Regulations, 1999.
Continue the series
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Fundclair maintains commitments, drawdowns and the capital account in one place, so that the figures underlying these tests do not have to be reconciled by hand. See how it works