SEBI has categorised Alternative Investment Funds into 3 categories:

Category 1: These funds invest in SMEs, start-ups, and new economically viable businesses with high growth potential.

• Venture Capital Fund (VCF)

New-age entrepreneurial firms that require large financing during their initial days can approach VCF. VCF can help them in overcoming the financial crunch. These funds invest in start-ups with high growth prospects. HNIs investing in VCFs adopt a high-risk, high-return strategy while allocating their resources.

• Angel Funds

These invest in budding start-ups and are called angel investors. They bring early business management experience with them. These funds invest in those start-ups that do not receive funding from VCF. The minimum investment by each angel investor is Rs 25 lakh.

• Infrastructure Funds

This fund invests in infrastructure companies, i.e., those involved in railway construction, port construction, etc. Investors who are bullish on infrastructure development invest their money in these funds. 

• Social Venture Funds

Funds investing in a socially responsible business are social venture funds. They are a kind of philanthropic investment but have a scope of generating decent returns for investors. 

Category 2

• Private Equity Funds

A private equity fund invests in unlisted private companies. It is difficult for unlisted companies to raise funds by issuing equity and debt instruments. Usually, these funds come with a lock-in period which ranges from 4 to 7 years. 

• Debt Funds

This fund primarily invests in debt securities of unlisted companies. Usually, such companies follow good corporate governance models and have high growth potential. They have a low credit rating, which makes them a risky option for conservative investors. As per SEBI guidelines, money accumulated by debt funds cannot be used to give loans.

• Fund of Funds

Such funds invest in other Alternative Investment Funds. They do not have an investment portfolio but focus on investing in different AIFs.

Category 3

• Private Investment in Public Equity Fund (PIPE)

A PIPE invests in shares of publicly traded companies. They acquire shares at a discounted price. Investment through PIPE is more convenient than going for a secondary issue owing to less paperwork and administration.

• Hedge Funds

Hedge funds pool money from accredited investors and institutions. These funds invest in both domestic and international debt and equity markets.

They adopt an aggressive investment strategy to generate returns for investors. However, hedge funds are expensive as fund managers can charge an asset management fee of 2% or more. They can also levy 20% of the returns generated as their fees.

Who Can Invest in an AIF?

Investors willing to diversify their portfolio can invest in AIFs if they meet the following eligibility criteria:

• Resident Indians, NRIs, and foreign nationals can invest in these funds.
• The minimum investment limit is Rs. 1 crore for investors, whereas the minimum investment amount for directors, employees, and fund managers is Rs. 25 lakh.
• AIFs come with a minimum lock-in period of three years. 
• The number of investors in every scheme is restricted to 1000, except angel funds, where the number of investors goes up to 49