Alternative Investment Fund or AIF is any fund established in India which is a privately pooled investment vehicle that collects funds from sophisticated investors, both Indian or foreign, for investing. This fund can deploy its money in accordance with a defined investment policy for the benefit of its investors.

AIF does not include funds covered under Indian market regulator SEBI’s mutual fund regulations. Those wishing to form an AIF can seek registration in three categories.

1. Category I AIFs can invest in start-ups, early stage ventures, social ventures, SMEs and sectors which the government or regulators consider as socially or economically desirable. They include venture capital funds like angel funds, SME Funds, social venture funds, infrastructure funds and such other AIFs as may be specified.
2. Category II AIFs are those which are not classified under Category I or Category III. They do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the regulations. Various types of funds such as real estate funds, debt funds, private equity funds, funds for distressed assets, etc. are registered as Category II AIFs.
3. Category III AIFs are funds which employ complex or diverse trading strategies and may employ leverage including through investment in listed or unlisted derivatives hedge funds, PIPE Funds, etc. are registered as Category III AIFs.

Category I and II AIFs are required to be close ended and have a minimum tenure of three years. Category III AIFs may be open ended or close ended. An AIF under the SEBI regulations can be 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.

No scheme of an AIF, with the exception of angel funds, shall have more than 1000 investors. In case of an angel fund, no scheme shall have more than forty-nine angel investors. An AIF cannot make an invitation to the public at large to subscribe its units and can raise funds from the sophisticated investors only through private placement. Each scheme of an AIF shall have a corpus of at least twenty crore rupees. In case of an angel fund, it shall have a corpus of at least ten crore rupees.

AIFs - other than angel funds - also cannot accept an investment of value less than one crore rupees from an investor. In case of investors who are employees or directors of the AIF or employees or directors of its manager, the minimum value of investment shall be 25 lakh rupees.