What are Alternative Investment Funds (AIFs) ?

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Alternative Investment Funds (AIFs) are privately pooled investment vehicles that collect money from investors to invest in assets beyond traditional stocks, bonds, or mutual funds. They are designed for investors - mainly High Net Worth Individuals (HNIs) - looking for high-return opportunities with diversified exposure and professional fund management.

 

AIFs in India are regulated by the Securities and Exchange Board of India (SEBI) and are classified into three categories based on their investment strategy and risk profile.

 

Category I – High-Growth Funds

These funds primarily invest in start-ups, small and medium enterprises (SMEs), and sectors with high growth potential.

 

1. Venture Capital Funds (VCFs)

VCFs support new-age entrepreneurial firms during their early stages when capital requirements are high. They provide essential funding to start-ups with strong growth prospects. HNIs investing in VCFs usually follow a high-risk, high-reward approach.

 

2. Angel Funds

Angel funds invest in budding start-ups that might not yet qualify for venture capital funding. Angel investors bring their business expertise along with capital. Each investor must contribute a minimum of ₹25 lakh.

 

3. Infrastructure Funds

These funds invest in companies involved in infrastructure development—like roads, railways, and ports. Investors bullish on India’s infrastructure growth often prefer these funds.

 

4. Social Venture Funds

Social venture funds focus on socially responsible businesses. Though they have a philanthropic element, these funds also aim to generate decent financial returns.

 

Category II – Growth and Stability Funds

These funds invest in unlisted companies and structured debt instruments but do not use leverage or borrowings for investment purposes.

 

1. Private Equity Funds

Private equity funds invest in unlisted private companies that cannot easily raise money through public equity or debt. They often have a lock-in period of 4–7 years, allowing time for business growth and exit strategies.

 

2. Debt Funds

Debt funds primarily invest in the debt instruments of unlisted companies that maintain strong governance but may have lower credit ratings. These funds are relatively risky and, as per SEBI norms, cannot be used to lend money directly.

 

3. Fund of Funds

These funds don’t invest directly in securities. Instead, they invest in other AIFs, offering a diversified approach across multiple fund strategies.

 

Category III – Aggressive Return Funds

These funds employ complex trading strategies and may use leverage to generate higher returns.

 

1. Private Investment in Public Equity (PIPE) Funds

PIPE funds invest in shares of publicly listed companies, usually at discounted prices. This is often a simpler and quicker alternative to raising capital through secondary market issues.

 

2. Hedge Funds

Hedge funds pool money from accredited investors and institutions to invest across domestic and global equity and debt markets. Known for their aggressive investment strategies, these funds can generate high returns but also carry higher risks. Fund managers typically charge around 2% management fees plus 20% of the profits.

Read More : Who Can Invest in AIFs?