Understanding AIF Categories in India: Types, Benefits & Taxation Explained
Explore all AIF categories in India including AIF structure, taxation, benefits, risk and more. Learn how Alternative Investment Funds (AIFs) help you diversify your portfolio beyond traditional assets.
Key Takeaways
- AIFs in India are classified by SEBI into three categories: Category I, II, and III.
- Each AIF category follows distinct investment strategies and risk levels.
- Minimum investment: ₹1 crore (₹25 lakh for AIF employees/directors).
- SEBI AIF Regulations ensure investor protection with transparency.
- Ideal for investors seeking long-term value creation with diversification and professional management.
What Are Alternative Investment Funds (AIFs)?
Alternative Investment Funds (AIFs) are privately pooled investment vehicles regulated by SEBI’s AIF Regulations, 2012.
They collect capital from sophisticated investors including Indian, foreign, or institutional and invest in non-traditional asset classes like private equity, venture capital, real estate, hedge funds, and also public equities.
AIFs in India can be structured as:
- Trusts (most common form)
- Companies
- Limited Liability Partnerships (LLPs)
These AIF funds offer access to expert fund managers who professionally manage high-growth opportunities like private equity, startups, real estate, or hedge strategies which are not typically accessible through mutual funds or retail instruments.
Everything About Alternative Investments Funds in India
Categories of Alternative Investment Funds (AIF) in India
| AIF Category | Investment Focus | Common Subtypes | Risk-Return Profile |
| Category I | Early-stage socially beneficial sectors | Venture Capital, Angel, SME, Infrastructure, Social Venture Funds | Moderate risk, high growth potential |
| Category II | Established businesses via private equity or debt | Private Equity, Debt, Fund of Funds, Real Estate | Medium to high risk, stable long-term returns |
| Category III | Complex trading and derivative-based strategies | Hedge Funds, PIPE, Derivatives Funds | High risk, high return, actively managed |
Category I AIFs – Growth and Impact Focused
These funds invest in sectors contributing to India’s economic and social growth – from startups to infrastructure.
Subtypes include:
- Venture Capital Funds (VCFs): Investments in early stage startups and emerging companies.
- Social Venture Funds: Measurable social impact combined with financial return.
- Infrastructure Funds: Finance infrastructure projects for a long-term, provided tax benefits
- Angel Funds: Provide seed capital to early-stage ventures along with mentorship.
SEBI Note: Category I AIFs enjoy certain tax incentives and regulatory support.
Category II AIFs – Private Equity & Debt-Based
This cat 2 AIF investment focuses on long-term investments in mature companies via equity or debt instruments aiming for steady long-term gains.
Examples include:
- Private Equity Funds: Acquire stakes in established private companies growth potential.
- Debt Funds: Lending to companies by investing in corporate bonds or structured debt instruments.
- Fund of Funds (FoFs): For portfolio diversification and dividing risk, it invests across multiple AIFs
Not eligible for government incentives, the Category II AIFs is a key driver for corporate funding and growth capital.
Category III AIFs – High-Risk, High-Reward Strategies
The category 3 AIFs use complex investment strategies leveraging derivatives, arbitrage, and short-selling for maximized returns even in unpredictable market conditions with a higher risk rate.
Key subtypes:
- Hedge Funds: Target absolute returns employing dynamic and advanced trading strategies in all market conditions.
- PIPE Funds: Invest privately in publicly listed companies.
- Derivatives Funds: Use futures and options for tactical trades.
These funds are suitable for experienced investors with higher risk appetite.
Category III AIFs Speciality
It is important to note that Category III AIFs are the only category explicitly allowed to Invest in listed securities (public equities).
They can operate much like hedge funds, pursuing strategies such as:
- Long–short equity (buying undervalued stocks, shorting overvalued ones)
- Arbitrage (cash–futures, merger, or index arbitrage)
- Equity market-neutral or momentum-based trades
- Active trading and tactical allocation across sectors and instruments
Aequitas offers their own category III AIF long-only opportunity, having exposure in public equities adhering to their valuation thesis – identifying undervalued stocks.
Who Can Invest in AIFs in India?
AIF typically caters to sophisticated HNI and UHNI investors with a high risk appetite.
- Eligible investors: Indian residents, NRIs, and foreign nationals.
- Minimum investment: ₹1 crore (₹25 lakh for fund managers/directors/employees). It is important to note that while the SEBI regulated threshold is put up at ₹1 crore, it can vary depending on the fundhouse.
- Lock-in period: It can go from 1 year to 3 years (may vary by fund type).
- Investor cap: Maximum 1,000 investors per AIF scheme (49 for angel funds)
Step by Step Guide on How to Invest in AIFs in India
Taxation of AIFs in India
| Aspect | Category I & II AIFs | Category III AIFs |
| Tax Structure | Pass-through (taxed at investor level) | Taxed at fund level |
| Capital Gains | LTCG: 10–20% depending on holding | Fund pays applicable capital gains tax |
| Interest Income | Taxed as per investor’s income slab | ~30% at fund level |
| Business Income | Taxed at fund level | Taxed at fund level |
(Source: SEBI & CBDT guidelines, FY 2025–26)
In short, while the Category III AIFs pay taxes directly at the fund level, category I and II AIFs put tax obligations on investors.
Everything about AIF Taxation in India
Benefits of Investing in AIFs
- Diversification: Beyond public equities, it gives access to alternative asset classes.
- Professional Management: Highly experienced AIF fund managers with deep market insights takes the charge
- Potential for Higher Returns: Especially through Category 3 AIFs
- Reduced Market Volatility: Less correlation with daily stock market movements.
- Strategic Long-Term Value: Ideal for investors with high-risk tolerance and long-term vision.
Why Aequitas’ AIF Stand Out: Exclusive Benefits for Investors
Here are some key features offered by Aequitas cat-III AIF, designed to deliver wealth growth through expertise and strategic investment.
- Parallel to our PMS – Aequitas’ flagship PMS and CAT III AIF share the same investment philosophy and approach, focusing on valuation and a margin of safety in listed Indian equities.
- Pooled Resources – Aequitas’ AIF operates as a pooled investment fund from multiple investors. This structure ensures that the expertise and efforts by our portfolio manager benefit all investors.
- Hassle-Free Taxation – Alternative Investment Funds simplify the investment journey by managing taxation at the fund level, allowing investors to enjoy returns without individual tax obligations.
- Diversified Portfolio – Aequitas’ AIF in India prioritizes risk management and aims for consistent growth. With a focus of ~25 stocks across sectors, maintaining a significant margin of safety.
- Regulatory Oversight – As SEBI-regulated funds, AIF Category III operates under a robust compliance framework, ensuring transparency and adherence to high governance standards.
Detailed Comparison: PMS vs. Alternative Investment Fund
Risks of AIF Investments
- High Entry Barrier: Minimum AIF investment amount ₹1 crore limits accessibility.
- Liquidity Risk: Lock-in periods restrict premature withdrawals.
- Regulatory and Market Risks: Subject to SEBI norms and macroeconomic shifts.
Aequitas’ Measures to Mitigate AIF Investment Risk
- With a lock-in period of just one year, Aequitas’ AIF offers investors greater flexibility in withdrawals compared to many traditional investment structures. However, investors are encouraged to align their participation with long-term financial goals to maximize the benefits of compounding and sustained growth.
- Aequitas’ AIF invests exclusively in public equities, which are generally less risky and less volatile than unlisted equities, pre-IPO placements, or derivative-based (F&O) strategies.
- Being a pooled investment vehicle, the fund enables investors to continuously benefit from new opportunities added to the common portfolio — even when their own capital contribution remains constant.
SEBI Regulations & Oversight
AIFs are governed by SEBI (Alternative Investment Funds) Regulations, 2012, ensuring:
- Full disclosure of fund strategy and risk.
- Strict investment and leverage limits.
- Regular compliance and reporting for investor protection.
Top AIFs in India – Top 5 Picks based on 5-Year CAGR
Rank | Fund House (AMC) | 5-Year CAGR (%) | Since Inception (%) |
1 | Aequitas Investment Consultancy Pvt. Ltd. | 38.3 | 23.8 |
2 | Abakkus Asset Manager Pvt. Ltd. | 32.7 | 30.0 |
3 | First Water Capital Advisors LLP | 26.3 | 32.9 |
| 4 | Abakkus Asset Manager Pvt. Ltd. | 26.3 | 19.7 |
| 5 | Guardian Capital Partners | 26.5 | 30.6 |
Source: as of Sep’25; PMSBazaar
The most consistently top performing AIF in India
FAQs: Categories of Alternative Investment Funds (AIFs)
- How many AIF categories exist in India?
There are three SEBI-defined categories—Category I, II, and III—based on investment strategy and risk level. - What is the minimum investment in an AIF?
₹1 crore for investors; ₹25 lakh for AIF employees or directors. - Are AIFs open to retail investors?
No. They are meant for high-net-worth and institutional investors. - Which AIF category is best for startups?
Category I AIFs—especially Venture Capital and Angel Funds—primarily invest in startups and early-stage ventures. - How are AIFs different from PMS?
PMS offers customized portfolios per investor; AIFs are pooled funds managed under a predefined investment strategy.
Conclusion
Alternative Investment Funds (AIFs) offer investors a regulated and strategic way to diversify beyond traditional assets, with each category catering to different risk and return profiles. Backed by SEBI oversight and professional fund management, AIFs enable high-net-worth investors to access high-growth opportunities in private equity, startups, and public markets. For those with long-term goals and higher risk appetite, AIFs like Aequitas’ Category III fund serve as a credible avenue for wealth creation and portfolio diversification in India’s evolving investment landscape.
