Alternative investment funds mean funds 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 benefits of its investors. Basically, alternative investment is form of Vehicle for making an investment in India as an alternative source to various entity either in equity or debt.
Categories of Alternative Investment Funds
Alternative Investment Funds - Category One
Category I alternative investment funds especially focuses on investing in startups, SMEs, social ventures. These are the key sectors as they are considered to be economically or socially desirable according to the government. Being socially desirable initiatives, profit may or may not be a motive of category I. Example: category I AIFs includes Angle funds, infrastructure funds, SMEs funds, and venture capital funds.
- Venture Capital Funds
- SME Funds
- Social Venture funds
- Infrastructure Funds
- And other Such other funds which may be prescribed under the regulation.
- "Angel Investment Funds” introduced by SEBI in 2013, under the head of Venture Capital.
Alternative Investment Funds - Category Two
- AIFs which do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the SEBI (Alternative Investment Funds) Regulations, 2012. Various types of funds such as real estate funds, private equity funds (PE funds), funds for distressed assets, etc. are registered as Category II AIFs.
- Funds which is not included under “Category 1 ”and “Category 3”
- And other funds which are not used for borrowing and only for carrying day to day operation
- Private Equity Funds and Debt Funds.
- Category I and II of AIF are not permitted to invest more than 25% of the investible funds in one Investee Company
- All AIFs are required to comply with the reporting norms to SEBI on a quarterly basis (for Category I, II AIFs and for those Category III AIFs which do not employ leverage)
Alternative Investment Funds - Category Three
- Alternative Investment Funds which adopt diverse or complex trading strategies and may adopt leverage including through investment in listed or unlisted derivatives. Various types of funds such as hedge funds; PIPE Funds, etc. are registered as Category III AIFs.
- An investment that is planned or designed to protect investment portfolio from market uncertainty, while generating positive returns in both up and down markets. It is an investment which shifts the risk of an investment portfolio or which balance the risk of an investment portfolio.
- An AIF under the SEBI (Alternative Investment Funds) Regulations, 2012 can be established or incorporated in the form of a trust or a company or a limited liability partnership or a body corporate. Most of the AIFs registered with SEBI are in trust form.