What Is an Alternative Investment Fund (AIF)? India's Fast-Growing Route for Private Capital, Explained
The government's new SME Growth Fund will reportedly be structured as an AIF. Here is what AIFs are, the three categories, and who can invest.
When the Union Cabinet approved the ₹10,000 crore SME Growth Fund on October 6, reports said it would operate as an Alternative Investment Fund (AIF). The term appears more and more in Indian business news. Here is what it means.
The basic idea
An AIF is a privately pooled investment fund. It collects money from investors, typically wealthy individuals, family offices, companies and institutions, and invests it according to a stated strategy: in start-ups, small and medium companies, real estate, infrastructure, private loans, or listed shares using sophisticated strategies.
Unlike a mutual fund, which is designed for the general public and can be bought for a few hundred rupees, an AIF is meant for experienced investors who can handle higher risk and longer lock-ins.
AIFs in India are regulated by SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012.
The three categories
SEBI divides AIFs into three categories:
- Category I: funds that invest in areas the government considers socially or economically desirable, such as start-ups (venture capital), SMEs, social ventures and infrastructure. Angel funds also fall here. A fund backing small manufacturers would naturally fit this category.
- Category II: funds that don't fit Categories I or III and do not borrow to invest beyond day-to-day needs, such as private equity funds, private credit (debt) funds and funds of funds. This is the largest category.
- Category III: funds that use complex or short-term trading strategies and may use leverage (borrowed money), similar to hedge funds, often investing in listed securities and derivatives.
Who can invest
- The minimum investment is generally ₹1 crore per investor (with limited exceptions, for example for the fund's employees and directors, and angel funds have their own rules).
- Each scheme must raise a minimum corpus set by the rules.
- Investments are usually locked in for several years, especially in Categories I and II, because the fund's own investments in private companies take time to grow and exit.
Why AIFs matter for the economy
AIFs channel private money into parts of the economy that banks and stock markets serve poorly: young companies without collateral, growing SMEs, and long-term projects. When the government puts money into an AIF, as with the SME Growth Fund, it can also attract private investors to invest alongside it, multiplying the capital available.
The risks
AIFs are not for most retail savers. Returns are not guaranteed, investments are illiquid, fees can be high, and information is less public than for mutual funds. For most people, regulated mutual funds and other mainstream products remain the better route to invest in Indian companies.
This explainer is for information only and is not investment advice.
Sources
This article draws on the following reporting. Dates are when each source was originally published.
- Wikipedia: Alternative investment
- Inc42: Cabinet Clears ₹10,000 Cr SME Fund To Back Manufacturing, Tech Focused SMEs
- Securities and Exchange Board of India: SEBI (official website)
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