Types Of AIFs
AIFs are categorized into three categories, based on their impact on the economy and the
regulatory regime intended for them:
These funds receive incentives from the government, SEBI or other regulating agencies.
These include social venture funds, infrastructure funds, venture capital funds and SME
funds. Category I AIFs are specifically targeted at making investments in SMEs, early stage
ventures, social ventures as well as start-up ventures in 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 AIFs. Examples of
Category I AIFs include angel funds, infrastructure funds, social venture funds, SME funds
and venture capital funds.
These funds are allowed to invest anywhere in any combination, but cannot take debts,
except for day-to-day operation purposes. These include private equity funds and debt
funds. According to the present form of the SEBI (Alternative Investment Funds)
Regulation, 2012, any AIFs that are not covered under Category I and Category III
definitions are classified as Category II AIFs. Unlike Category III AIFs, Category II AIFs are
close ended in nature and not allowed to utilise leverage or borrowing mechanisms to
generate capital for making investments capable of generating future returns/profits.
However a Category II AIF is allowed to borrow or use leverage strategies to meet financial
obligations for day to day operations.
Funds that make short-term investments and then sell, like hedge funds, come under this.
Category III AIFs are a unique class of private pooled funds that employ a range of
complicated trading strategies including but not limited to arbitrage, margin trading,
futures and derivatives trading, etc. to generate returns. This category of AIF is also
allowed to utilise leverage in order to make investments in both unlisted and listed
derivatives as specified by SEBI (Alternative Investment Funds) Regulation, 2012. Leading
examples under this alternative investment fund category include PIPE Funds and Hedge