Alternative Investment Funds are the investments which do not happen via the traditional modes of investment such as stocks, bonds, cash, property etc. Some of the alternative investments include the commodities, private equity, hedge funds, venture capital, and financial derivatives as well as assets such as paintings, other arts, wines, antiques coins and stamps.
Alternative Investment Fund or AIF means any fund 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 benefit of its investors.
Types of AIFs
AIFs are categorized into the following three categories, based on their impact on the economy and the regulatory regime intended for them:
Category I AIF are those AIFs with positive spillover effects on the economy, for which certain incentives or concessions might be considered by SEBI or Government of India; Such funds generally invests in start-ups or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable.
Example: Venture Capital Funds, SME Funds, Social Venture Funds and Infrastructure Funds.
Category II AIF are those AIFs for which no specific incentives or concessions are given. They do not undertake leverage or borrowing other than to meet the permitted day to day operational requirements, as is specified for Category I AIFs.
Example: Private Equity or Debt Fund.
Category III AIF are funds that are considered to have some potential negative externalities in certain situations and which undertake leverage to a great extent. These funds trade with a view to make short term returns. These funds are allowed to invest in Category I and II AIFs also.
Example: Hedge Funds