India’s investment landscape has evolved significantly in recent years, and Alternative Investment Funds (AIFs) have emerged as a powerful vehicle for high-net-worth individuals, institutional investors, and family offices. But with three different AIF categories — each with its structure, strategy, and regulatory norms — the question is: which one suits your investment goals?

In this guide, we’ll walk you through each AIF category, their features, who they’re ideal for, and what to keep in mind when considering alternative investment fund registration in India. Whether you’re looking to set up an AIF or invest in one, understanding the category distinctions is key.

What Is an AIF?

An Alternative Investment Fund (AIF) is a privately pooled investment vehicle that collects funds from investors, for investing according to a defined investment policy. These funds are not traditionally regulated mutual funds or retail products and often involve higher risks — but also higher return potential.

AIFs are regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Alternative Investment Funds) Regulations, 2012. If you're considering AIF registration with SEBI, you’ll need to clearly define which category your fund belongs to.

The Three Categories of AIFs — Explained

Let’s explore the three distinct AIF categories as defined under SEBI guidelines, so you can better align your investment strategy or fund structure.

Category I AIF: Growth-Oriented and Social Impact Funds

Who It's For: Investors looking to support startups, SMEs, infrastructure projects, or socially beneficial sectors

What It Includes:

1. Venture Capital Funds

2. SME Funds

3. Infrastructure Funds

4. Social Venture Funds

5. Angel Funds (sub-category)

Key Features:

1. Encouraged and incentivized by the government due to their impact on the economy

2. Generally low-risk from a regulatory perspective

3. Tax pass-through status available for some sub-types

Best For:

1. Investors seeking early-stage or impact-driven investments

2. Founders looking to raise capital for startups or infrastructure projects

Why Choose This:
If your goal is to support sectors that drive innovation or economic development while pursuing high-risk/high-reward opportunities, Category I AIF is ideal.

Category II AIF: Traditional Private Equity and Debt Funds

Who It's For: Investors looking for long-term capital appreciation through private equity or debt instruments

What It Includes:

1. Private Equity Funds

2. Debt Funds

3. Fund of Funds (not investing in Category III)

Key Features:

1. No specific incentives or concessions from the government

2. Cannot employ leverage except for day-to-day operational requirements

3. Commonly used for real estate, growth capital, and structured debt investments

Best For:

1. PE firms, institutional investors, or family offices seeking stable returns

2. Fund managers planning to pool capital for mid- to large-scale investments

Why Choose This:

Category II AIF is the go-to for more conventional alternative investments — a sweet spot between risk and return, without the volatility of Category III funds.

Category III AIF: High-Risk, High-Return Strategies

Who It's For: Experienced investors and fund managers dealing in complex, market-linked strategies

What It Includes:

1. Hedge Funds

2. Public Market Strategies

3. Derivative Trading

4. Long-Short Funds

Key Features:

1. Allowed to use leverage

2. Higher risk, potentially higher returns

3. Requires daily/weekly NAV disclosures

4. Heavily regulated and scrutinized by SEBI

Best For:

1. Investors are comfortable with market volatility and complex instruments

2. Fund managers with active trading strategies

Why Choose This:
If your goal is to generate alpha through active trading and market timing, Category III AIF gives you the tools, but with significantly higher exposure to market fluctuations.
Also Read: Documents Required for Recovery of Shares from IEPF

Which AIF Category Is Right for You?

Here’s a quick comparison to help you decide:

FeatureCategory ICategory IICategory IIIFocusEarly-stage/startups, infrastructurePrivate equity, debtPublic markets, hedge fundsLeverageNot allowedLimitedAllowedRisk LevelModerate to HighMediumHighInvestor TypeLong-term growth, impact investorsTraditional PE, debt investorsTraders, hedge fund backersRegulatory OversightModerateModerateHigh

Key Points to Consider Before AIF Registration

If you're planning AIF registration with SEBI, keep these essential factors in mind:

1. Minimum Corpus: ₹20 crore (₹10 crore for angel funds)

2. Minimum Investment Per Investor: ₹1 crore (₹25 lakh for employees or directors of the fund)

3. SEBI Approval Timeline: Typically 6 to 12 weeks after application

4. Compliance Requirements: Regular disclosures, audited financials, KYC norms, and investor reporting

Whether it’s for Category I, II, or III, SEBI AIF registration demands a detailed fund structure, legal documentation, and a clear investment strategy.

How to Register an AIF with SEBI

Here’s a simplified view of the AIF registration process in India:

1. Determine Fund Category and Structure

2. Draft Trust Deed / LLP Agreement / Company MOA

3. Prepare Offering Memorandum (PPM)

4. Appoint Key Service Providers (Custodian, Auditor, etc.)

5. Submit Application via SEBI’s Intermediary Portal

6. Respond to Clarifications from SEBI (if any)

7. Receive SEBI Registration Certificate

Once registered, your AIF can begin onboarding investors and executing its investment strategy in compliance with SEBI norms.
Also Read: Challenges Faced During NBFC Registration Process

Conclusion

Each AIF category in India serves a unique purpose and caters to a different investment philosophy. Whether you’re drawn to high-impact ventures, steady private equity returns, or dynamic hedge fund-style strategies, selecting the right category is the first — and most crucial — step in a successful fund journey.

Understanding the nuances of AIF registration with SEBI not only streamlines compliance but also aligns your fund’s objectives with investor expectations and regulatory norms.

If you're ready to start your alternative investment fund registration or simply want clarity on how to proceed, our team is here to guide you, from structuring to full SEBI AIF registration.

Frequently Asked Questions

1. Can a single AIF invest in multiple asset classes?
Yes, but the fund must stay within the permitted scope of its registered category. For example, Category II AIFs cannot invest in listed derivatives like Category III funds.

2. How long does AIF registration with SEBI take?
On average, it takes 6 to 12 weeks, depending on the completeness of your documents and the complexity of your fund structure.

3. Is AIF registration mandatory for private investment pools in India?
Yes, if the fund meets the criteria outlined under SEBI’s AIF regulations, registration is mandatory to operate legally.