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An Indian Alternative Investment Fund (AIF) is a privately pooled vehicle raised through private placement for sophisticated Indian or foreign investors. Most investors must commit at least ₹1 crore, and Category I and II funds normally lock capital for at least three years. Costs, withdrawal rights and risk vary by category and by the fund’s placement memorandum, so no investor should rely on a headline fee or assume daily liquidity.
What is an Indian AIF?
SEBI defines an AIF as “any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.” The fund raises money by private placement rather than a public offer and invests according to a stated strategy.
The structure is intended for investors who can understand complex strategies and bear the possibility that capital will be tied up or lost. An AIF may invest primarily in unlisted or otherwise illiquid securities. That is why eligibility, minimum commitment, valuation method, fees, conflicts and exit provisions matter as much as the fund’s target return.
“An AIF may raise funds from any sophisticated investor whether Indian, foreign or non-resident Indians, who inter alia undertake risk of investing in primarily unlisted or illiquid securities.” — Securities and Exchange Board of India, AIF FAQ, question 20 (2017).
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Who can invest in an AIF?
Eligible investor groups
AIFs can accept money from sophisticated investors who are Indian residents, foreign investors or non-resident Indians, subject to applicable law, the fund documents and any country-specific restrictions. Units are issued through private placement; an AIF cannot solicit the general public as if it were a retail mutual fund.
Being wealthy does not by itself make an investment suitable. The investor must be able to meet the commitment, understand the strategy and tolerate uncertain valuations, delayed distributions and possible loss of capital. Foreign and non-resident investors also need to consider exchange-rate, remittance, tax and regulatory requirements that apply to their circumstances.
Minimum commitment by investor type
| Investor or scheme | Minimum amount | Qualification or limitation |
|---|---|---|
| Ordinary investor in a non-angel AIF scheme | ₹1 crore | Normal minimum commitment per investor. |
| Employee or director of the AIF or its manager | ₹25 lakh | Available only to a qualifying employee or director under the applicable rules. |
| Angel investor in an angel-fund scheme | ₹25 lakh | Must meet the regulatory definition of an angel investor and the fund’s own eligibility rules. |
The ₹1 crore figure is the ordinary minimum for an investor in a non-angel scheme. It is not a universal minimum for every AIF product: qualifying employees or directors and angel-fund investors follow separate thresholds. The placement memorandum should state the exact subscription, drawdown and commitment mechanics.
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| Scheme type | Minimum corpus | Maximum number of investors |
|---|---|---|
| Non-angel AIF scheme | ₹20 crore | 1,000 investors |
| Angel-fund scheme | ₹10 crore | 49 angel investors |
These are scheme-level requirements, separate from the amount an individual investor must commit. A fund may set a higher minimum, require staged drawdowns or close subscriptions once its target corpus is reached.
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How do Category I, II and III AIFs differ?
| Category | Typical focus | Leverage and trading profile | Liquidity structure |
|---|---|---|---|
| Category I | Start-ups, early-stage ventures, social ventures, small and medium-sized enterprises, infrastructure, venture-capital funds and angel funds. | Designed for areas considered socially or economically desirable; the strategy and permitted investments are set out in the fund documents. | Generally close-ended, with a minimum three-year tenure. |
| Category II | Private equity, real estate and distressed-asset funds, plus strategies that do not fit Category I or III. | Cannot undertake leverage or borrowing except for permitted day-to-day operational requirements. | Generally close-ended, with a minimum three-year tenure. |
| Category III | Hedge-fund-style, PIPE and other diverse or complex trading strategies. | May use leverage and listed or unlisted derivatives. The cited framework states leverage should not exceed two times net asset value (NAV). | May be open-ended or close-ended, depending on the scheme. |
The category is a regulatory classification, not a promise about risk or performance. Two funds in the same category can hold very different assets, use different valuation policies and have different borrowing, concentration and redemption terms. Read the individual investment policy rather than selecting solely by category.
How much does an AIF cost?
There is no single investor price
AIF fees are fund-specific. The placement memorandum must provide a detailed tabular example showing fees, charges and the distribution waterfall. Use that example to calculate what reaches investors at different performance levels, not merely the headline management-fee percentage.
- Management fee: Check whether it is charged on committed capital, invested capital, NAV or another base, and whether the rate changes after the investment period.
- Performance fee or carried interest: Identify the percentage, the timing of crystallisation and whether the manager receives carry deal by deal or only after investors recover capital.
- Hurdle rate and catch-up: Establish the return investors receive before performance participation and how any catch-up provision changes the split.
- Fund expenses: Review administration, custody, audit, legal, valuation, transaction, brokerage, due-diligence and special-purpose-vehicle costs.
- Taxes and investor charges: Ask how applicable taxes are allocated and whether transfer, redemption or other investor-level charges apply.
Request a worked distribution waterfall using conservative, base-case and high-return outcomes. A fund with a lower management fee can still leave investors with less if its carry, expenses or hurdle mechanics are more expensive.
SEBI registration fees are fund-level costs
| AIF registration category | SEBI registration fee listed in the FAQ |
|---|---|
| Category I | ₹5 lakh |
| Category II | ₹10 lakh |
| Category III | ₹15 lakh |
| Angel Fund | ₹2 lakh |
These amounts are registration fees paid by the fund to SEBI. They are not a quote for what an individual investor will pay and should not be confused with management fees, carried interest or operating expenses.
Can you withdraw your money whenever you want?
Category I and II: plan for a lock-up
Category I and Category II AIFs must be close-ended and have a minimum three-year tenure. The fund documents may provide a longer term, extensions, staged distributions or a wind-up process. A three-year minimum therefore does not mean that every investment will be returned exactly at the end of year three.
Category III: terms depend on the scheme
Category III AIFs may be open-ended or close-ended. An open-ended structure still does not guarantee daily dealing: the memorandum can impose notice periods, gates, suspension rights, side pockets or other conditions. A close-ended Category III fund follows its stated term and exit provisions.
Why an easy exit may not exist
AIFs can hold unlisted shares, private-company debt, property interests or distressed assets for which there is no reliable secondary market. Even where a transfer is technically permitted, the buyer may require manager consent, a valuation adjustment or completion of legal and tax checks. Read the redemption, transfer, suspension, extension and wind-up clauses before subscribing; do not treat the NAV shown in a report as cash that can necessarily be withdrawn.
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Illiquidity and lock-up risk
Private assets may take months or years to sell, and a fund may be unable to meet an attempted exit at the requested time. Category II’s close-ended structure makes the stated tenure and any extension provisions central to planning.
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Valuation uncertainty
Unlisted securities do not have a continuous quoted price. Valuations may depend on models, comparable transactions, independent valuers or manager judgments. Ask how often assets are valued, who approves the methodology and how stale or disputed valuations are handled.
Strategy and concentration risk
A fund concentrated in one sector, geography, borrower, developer or stage of company can suffer disproportionate damage from a single event. Under the cited framework, Category I and II AIFs generally cannot invest more than 25% of investible funds in one investee company, while Category III is generally limited to 10%. Confirm how the limit is calculated and whether look-through, connected entities or temporary breaches are treated differently.
Leverage and derivative risk
Category III strategies may borrow and use listed or unlisted derivatives. Leverage magnifies gains and losses, can create margin calls and may force sales during stressed markets. The cited framework states that Category III leverage should not exceed two times NAV; verify the current limit, measurement method and permitted exceptions in the latest documents.
Manager, sponsor and conflict risk
Investment decisions, valuations, related-party transactions and allocation of opportunities can create conflicts. SEBI requires the placement memorandum to disclose conflicts, investments, fees, risks, valuation practices and disciplinary history. Read those disclosures and ask how conflicts are identified, approved and reported.
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Fee drag and waterfall risk
Management fees and expenses reduce NAV regardless of whether the fund has distributed profits. Carry, hurdles, catch-ups and clawbacks can materially change the investor’s net return. Model the waterfall rather than comparing one percentage in isolation.
Redemption, suspension and wind-up risk
Terms may permit delayed redemptions, suspension of dealing, side pockets for hard-to-value assets or an extension of the fund’s life. A wind-up can also produce uneven distributions as assets are sold at different times and prices.
Tax and regulatory risk
Tax treatment can differ by category, asset, investor status and jurisdiction, and rules can change during a fund’s life. Obtain advice for your own situation and check amendments before investing or transferring units.
How to perform due diligence before committing
- Verify registration: Check the fund and manager against SEBI’s registered-AIF information and confirm the legal name, category and scheme.
- Read the latest placement memorandum: Review the investment policy, eligible assets, tenure, extensions, drawdowns, distributions, redemption and transfer rules.
- Recalculate all costs: Use the required fee and distribution-waterfall example to estimate net outcomes after management fees, carry, expenses and taxes.
- Test valuation and conflicts: Identify the valuer, valuation frequency, approval process, related-party rules and the manager’s disclosed disciplinary history.
- Check portfolio limits and leverage: Confirm concentration limits, borrowing powers, derivative use, collateral rules and how NAV-based leverage is measured.
- Map the exit path: Ask when distributions are expected, what can trigger an extension or suspension, whether transfers require consent and how wind-up proceeds are allocated.
- Match the commitment to your finances: Keep enough liquid assets outside the AIF for emergencies, taxes and goals that occur before the fund can return capital.
What the 2024 and 2025 regulatory dates mean
The core rule text cited for the minimum investment, categories and scheme limits comes from SEBI’s official AIF FAQ dated 2017. SEBI’s FAQ index records AIF registration FAQs updated on January 3, 2025, and post-registration FAQs dated June 26, 2025. Fund-specific terms and later amendments must therefore be checked in the current placement memorandum and applicable regulations.
RBI’s notice dated March 27, 2024 addresses prudential treatment for banks, non-bank financial companies and other regulated entities investing in AIFs. It does not state a new ordinary-investor minimum. Do not use that notice as a substitute for checking your own eligibility or the fund’s current documents.
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