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1Clear out junk files and repair common Windows errors2Scan for outdated or missing drivers - takes under a minute3Repair Windows errors before they cause bigger problemsIndian Alternative Investment Funds (AIFs) are privately placed vehicles for sophisticated investors, not public mutual funds. For most investors, entry starts at ₹1 crore, Category I and II schemes lock money for at least three years, and the exact fees, liquidity terms and risks are set out in the fund’s placement memorandum.
What is an AIF?
SEBI defines an AIF as a fund established or incorporated in India that privately pools money from sophisticated Indian or foreign investors and invests it according to a defined policy for their benefit. Units are offered through private placement, so an AIF cannot solicit the general public in the way a retail mutual fund does.
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The structure is designed for investors who can understand complex strategies, tolerate losses and hold assets that may be difficult to sell. An AIF may invest substantially in unlisted companies, private credit, property, infrastructure or trading positions. That combination can provide access to opportunities outside public markets, but it also means less transparency, less frequent pricing and fewer ways to exit.
SEBI’s core AIF FAQ is dated 2017. The regulator’s FAQ index records registration FAQs updated on January 3, 2025, and post-registration FAQs dated June 26, 2025. A prospective investor should therefore read the latest scheme documents and amendments rather than relying on an old summary of the rules.
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Who is eligible to invest?
Sophisticated Indian, foreign and NRI investors
An AIF may accept money from sophisticated investors who are Indian residents, foreign investors or non-resident Indians. The fund manager must follow the eligibility and know-your-customer requirements in the scheme documents, and the fund may refuse an application that does not meet its criteria.
“Sophisticated” does not mean that a person must be a bank or institutional investor. It means the investor is prepared to evaluate an illiquid, privately negotiated investment and to bear the possibility of losing capital. AIF units are not intended to be sold indiscriminately to the public.
Employees and directors connected with the fund
Employees or directors of the AIF or its manager can invest with a minimum of ₹25 lakh, rather than the ordinary ₹1 crore threshold. The lower amount applies only when the person meets the qualifying relationship in the applicable rules and scheme documents; it is not a general discount for any employee of a financial company.
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Angel-fund investors
Angel funds have separate eligibility and ticket rules. An angel investor may invest at least ₹25 lakh, subject to the regulatory definition of an angel investor and the particular fund’s admission conditions. The fund’s memorandum should explain how it determines eligibility, commitment periods and drawdowns.
What is the minimum investment and fund size?
| Requirement | Rule or stated threshold | Important qualification |
|---|---|---|
| Ordinary minimum per investor | ₹1 crore | Applies to a typical non-angel AIF investment under the SEBI FAQ framework. |
| Qualifying employee or director minimum | ₹25 lakh | Only for an employee or director of the AIF or its manager who meets the applicable conditions. |
| Angel-investor minimum | ₹25 lakh | Subject to the angel-investor definition and angel-fund rules. |
| Minimum corpus of a non-angel scheme | ₹20 crore | The scheme must reach this corpus requirement. |
| Minimum corpus of an angel-fund scheme | ₹10 crore | Applies at scheme level, not as an individual investor ticket. |
| Maximum investors | 1,000 in a non-angel scheme; 49 angel investors in an angel-fund scheme | These are scheme-level limits. |
The ₹1 crore figure is a minimum commitment or investment threshold, not a recommended portfolio allocation. A fund may set a higher first-close amount, require additional capital calls or impose different minimums for later subscriptions. Confirm whether the memorandum treats the amount as a one-time subscription, a committed amount drawn over time or a combination of both.
The corpus and investor-count rules also affect whether a proposed fund can accept an application. A fund that has not met its required corpus may delay closing, return commitments or follow the remedies specified in its documents.
How are AIFs classified?
| Category | Typical strategies and assets | Leverage and structure | Investor implications |
|---|---|---|---|
| Category I | Start-ups, early-stage ventures, social ventures, small and medium enterprises, infrastructure, venture-capital funds and angel funds | Generally intended for sectors considered socially or economically desirable; scheme documents define the permitted investments. | Often involves young or unlisted businesses, long holding periods and material valuation uncertainty. |
| Category II | Private equity, real estate and distressed-asset funds, plus strategies that do not fit Category I or III | Must not undertake leverage or borrowing except for permitted day-to-day operational requirements. | Investors face private-market liquidity limits and dependence on exits such as a sale, refinancing or listing. |
| Category III | Diverse or complex trading strategies, including hedge-fund and PIPE-style approaches | May use leverage and listed or unlisted derivatives; the cited framework states leverage should not exceed two times NAV. | Returns and losses can change quickly because of market, derivative, financing and counterparty exposures. |
Category labels are not risk ratings. A Category I venture fund can lose most of its capital in failed companies, while a Category III fund can experience rapid losses from a leveraged position. Read the actual strategy, permitted instruments, concentration limits and valuation policy rather than inferring safety from the category number.
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There is no universal investor price
An AIF has no standard all-in fee charged to every investor. The placement memorandum must provide a tabular example showing fees, charges and the distribution waterfall. That example is the starting point for calculating what reaches the investor after expenses and performance allocations.
Compare the following items in the specific memorandum:
- Management fees, including the fee base, rate, payment frequency and whether the fee is charged during the investment period and after it.
- Performance fees or carried interest, including the percentage, timing and conditions for payment.
- Any hurdle rate, preferred return, catch-up or clawback that changes how profits are divided.
- Fund expenses such as custody, administration, audit, legal, valuation, transaction and broken-deal costs.
- Taxes borne by the fund or investor and the treatment of withholding or distributions.
- Redemption, transfer, exit or early-transfer charges, where the fund permits those transactions.
How the waterfall affects your return
A waterfall explains the order in which cash is distributed. A typical illustration may show return of contributed capital first, then a preferred return or hurdle, followed by a manager performance allocation and the investor’s residual share. The actual order, percentages and clawback protections vary. Use the memorandum’s worked example to model a gain, a partial exit and a loss; a headline return before fees is not the amount you necessarily receive.
SEBI registration fees are fund-level costs
The SEBI FAQ lists registration fees of ₹5 lakh for Category I, ₹10 lakh for Category II, ₹15 lakh for Category III and ₹2 lakh for Angel Funds. These are fees paid by the fund for registration. They are not a quote for what an investor will pay, and they do not replace the management, performance and operating expenses disclosed in the scheme memorandum.
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Category I and II: close-ended by rule
Category I and Category II AIFs must be close-ended and have a minimum tenure of three years. Your capital can therefore remain committed until the stated maturity date, an approved extension or a permitted early exit. Even after the minimum term, an exit may depend on the manager selling an asset or finding a buyer for your interest.
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Category III: open-ended or close-ended
Category III AIFs may be open-ended or close-ended. An open-ended label does not guarantee daily dealing. The memorandum controls dealing dates, notice periods, gates, suspension rights, side-pocket arrangements and settlement timing. A close-ended Category III scheme will instead specify its tenure and exit process.
Why a secondary sale may not solve the problem
AIFs can hold unlisted or otherwise illiquid securities. A transfer may require manager consent, a buyer, regulatory checks and payment of transfer expenses. A buyer may demand a discount because the position is difficult to value or because only a limited time remains in the fund. Treat a secondary transfer as a possible remedy, not as a guaranteed market.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What risks apply to Category II and Category III AIFs?
- Illiquidity and lock-up: Capital can be unavailable for years, and distributions may arrive later than expected.
- Valuation uncertainty: Unlisted assets may be valued using models, comparables or manager judgments rather than a continuously quoted market price.
- Strategy and concentration risk: A fund focused on one sector, geography, borrower type or small group of companies may suffer if that exposure weakens.
- Manager, sponsor and conflict risk: Related-party transactions, allocation decisions, affiliated service providers or competing funds can affect outcomes. The memorandum should describe conflicts and controls.
- Fee drag and waterfall economics: Management expenses and performance allocations reduce the amount available to investors, particularly when returns are modest or exits are delayed.
- Leverage and derivatives: Category III borrowing, margin and derivatives can magnify gains and losses, create collateral calls and add counterparty risk. The cited framework states that Category III leverage should not exceed two times NAV, but the fund’s own limit may be lower.
- Redemption, suspension and wind-up risk: A fund may restrict dealing or suspend redemptions under the circumstances set out in its documents.
- Tax and regulatory change: The tax treatment, reporting obligations or permitted investments can change during the fund’s life.
Concentration limits provide a framework, not a guarantee. Category I and II AIFs generally cannot invest more than 25% of investible funds in one investee company; Category III is generally limited to 10%. Check the precise calculation, exceptions and compliance language in the current memorandum.
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What should you check before committing?
- Verify the fund and manager. Check the fund against SEBI’s registered-AIF information and confirm the legal name, category, scheme and manager shown in the offer documents.
- Read the latest placement memorandum. Do not rely on a presentation or an old term sheet. Obtain every amendment, supplement and investor communication that changes fees, strategy, tenure or liquidity.
- Map the cash flows. Record the subscription or commitment, drawdown schedule, management fees, expenses, expected distributions, extension rights and the date on which the fund can wind up.
- Recreate the fee and waterfall example. Calculate what happens after a profitable exit, a delayed exit and a loss. Ask whether fees are charged on committed capital, invested capital, NAV or another base.
- Test valuation and reporting. Identify who values each asset, how often valuations are struck, which standard is used and what independent review exists. Ask how stale or disputed valuations are handled.
- Review conflicts and disciplinary history. Look for related-party transactions, allocation policies, outside business interests and the disciplinary history disclosures required in the memorandum.
- Check concentration, borrowing and derivatives. Compare the stated limits with the strategy you are actually being offered. For Category III, understand margining, collateral, counterparties and the consequences of a rapid loss.
- Clarify exit and wind-up mechanics. Ask when distributions are expected, whether the manager can extend the term, how a transfer is approved, when redemptions can be suspended and what happens if assets cannot be sold.
- Obtain tax advice for your facts. Tax outcomes can depend on residency, entity type, the nature of income and later rule changes. The fund’s tax summary is not a substitute for advice on your return.
How RBI’s 2024 notice fits in
RBI’s notice dated March 27, 2024 addresses prudential treatment for banks, non-bank finance companies and other regulated entities investing in AIFs. It does not state a new ordinary-investor minimum for AIF subscriptions. An individual should not interpret that notice as changing the ₹1 crore threshold or as approving a particular fund. It matters mainly when the investor, sponsor or investing entity is itself subject to RBI prudential rules.
Quick Recap
Questions to resolve with the fund manager
- Is my amount a commitment drawn over time or an immediately invested subscription?
- What is the expected investment period, and what events can extend the fund?
- Which expenses can be charged to the fund, and are there caps or related-party safeguards?
- How are unlisted holdings valued, and how often are valuations independently reviewed?
- What happens if I need to transfer my interest before maturity?
- Under what conditions can redemptions, distributions or valuations be suspended?
- What is the maximum permitted concentration, borrowing and derivative exposure for this scheme?
- How does the waterfall divide proceeds in a loss, break-even outcome and strong exit?
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