Alternative Investment Funds (AIFs) have emerged as powerful vehicles for high-net-worth investors looking beyond traditional stocks and bonds. Whether you’re planning to invest in real estate, startups, or private debt, choosing the right type of AIF is crucial. With different regulatory requirements and investment scopes, not all AIFs are created equal.
If you’re planning AIF registration or want to understand what category suits your investment strategy, this guide will help you make an informed decision. We’ll also explain how AIF registration with SEBI works and the typical structures used for each investment focus.
What Is an Alternative Investment Fund (AIF)?
An AIF is a privately pooled investment vehicle that collects capital from sophisticated investors to invest in areas outside traditional avenues. These funds are regulated by the Securities and Exchange Board of India (SEBI) under the AIF Regulations, 2012.
AIFs are broadly divided into three categories, each with its own scope and limitations:
- Category I: Focused on socially or economically desirable sectors like startups, SMEs, infrastructure, and social ventures.
- Category II: Funds that do not fall under Category I or III, typically including real estate, private equity, and debt funds.
- Category III: Funds that employ complex strategies or leverage, such as hedge funds and structured credit funds.
Let’s look at which category suits real estate, startup, and debt investments.
1. Real Estate Investment – Category II AIF
If you’re looking to invest in real estate through an AIF, Category II is the most suitable structure.
Why Category II?
Category II AIFs are permitted to invest in:
- Real estate development projects
- Land acquisition
- Commercial or residential assets
- Rental-yielding properties
They cannot use leverage (except for day-to-day operational requirements), and they operate with a long-term, illiquid investment horizon.
Ideal Use Cases
- Investing in under-construction or distressed real estate
- Pooling investor funds for large-scale real estate development
- Structured deals with builders or real estate companies
Structure and Tenure
- Typically structured as a trust or LLP
- Minimum tenure: 3 years
- Tenure usually ranges between 5 to 7 years, extendable by two years
- Ideal for investors looking for capital appreciation and long-term growth
SEBI Requirements for Real Estate AIFs
- Minimum corpus: ₹20 crore
- Minimum investment per investor: ₹1 crore (₹25 lakh for employees or directors of the fund)
- Sponsor commitment: At least 2.5% of the fund corpus or ₹5 crore, whichever is lower
- AIF registration with SEBI is mandatory before starting fundraising
Also Read: Documents Required for Recovery of Shares from IEPF
2. Startup Investment – Category I AIF
If your focus is on investing in early-stage startups, SMEs, or innovation-driven businesses, Category I AIFs are the most appropriate.
Why Category I?
SEBI has created this category to encourage investment in areas that have positive spillover effects on the economy and job creation. These include:
- Startups
- Early-stage ventures
- Social venture funds
- SME funds
- Infrastructure funds
Category I AIFs enjoy certain regulatory relaxations and are often encouraged by government initiatives such as the Startup India program.
Ideal Use Cases
- Venture capital firms looking to pool capital for tech startups
- Angel investor networks formalizing into regulated funds
- Social entrepreneurs seeking impact capital
Structure and Tenure
- Minimum tenure: 3 years
- Lock-in based on the fund’s investment strategy and exit plan
- Structured as trusts or companies with fund managers registered under SEBI norms
SEBI Requirements for Startup AIFs
- Minimum fund size: ₹20 crore
- Minimum ticket size per investor: ₹1 crore (₹25 lakh for employees or directors)
- Sponsor commitment: At least 2.5% of the corpus or ₹5 crore
- Must be registered under Category I AIF for access to specific tax benefits and regulatory exemptions
Advantages
- Exempt from some of the restrictions applicable to Category II or III
- Encouraged under policy frameworks
- Easier access to government-backed seed capital initiatives
Also Read: How to Register NBFC with RBI?
3. Debt Investment – Category II or III AIF
When it comes to debt, both Category II and Category III AIFs may be used, but the choice depends on the risk profile and complexity of your investment strategy.
Category II for Private Debt
For conservative or structured credit investments (such as mezzanine financing, distressed assets, or private lending), Category II AIFs are commonly used.
Ideal for:
- Credit funds
- Structured debt products
- Lending to mid-market companies
- Investing in distressed assets
These funds avoid leverage and operate with longer lock-in periods.
Category III for Structured or Leveraged Credit
If you plan to use complex trading strategies, leverage, or invest in public debt instruments and derivatives, Category III AIFs are a better fit.
Ideal for:
- Hedge funds
- Long/short debt strategies
- Structured arbitrage funds
- Complex credit derivatives
Key Differences Between Category II and III for Debt
| Feature | Category II | Category III |
|---|---|---|
| Leverage | Not allowed | Allowed |
| Strategy | Conservative | Aggressive |
| Liquidity | Longer tenure | Shorter cycles possible |
| Risk Level | Moderate | High |
SEBI Guidelines for Debt AIFs
- Corpus: Minimum ₹20 crore
- Investor minimum: ₹1 crore
- Sponsor commitment: 2.5% or ₹5 crore
- For Category III, daily NAV reporting and stricter compliance are required
How to Get AIF Registration from SEBI
Regardless of the category, all AIFs must be registered with SEBI before raising funds. Here’s a quick overview of the registration process:
Step-by-Step AIF Registration:
- Select structure: Choose whether the fund will be a trust, LLP, or company.
- Draft documents: Prepare trust deed or LLP agreement, fund strategy, and compliance documents.
- Appoint key personnel: Ensure fund managers and compliance officers meet SEBI eligibility norms.
- Submit application to SEBI: Apply under the correct category (I, II, or III) with all documentation.
- Review and clarifications: SEBI may request additional information or changes.
- Receive registration: Once approved, SEBI issues a certificate of registration.
The entire process typically takes 8–12 weeks, depending on documentation and complexity.
Final Thoughts
Choosing the right AIF category depends entirely on your investment goals:
- If you’re targeting real estate or private equity, go with Category II.
- For early-stage startups or socially impactful ventures, opt for Category I.
- If you’re diving into debt, your choice between Category II and III depends on whether you plan to use leverage or complex strategies.
Understanding AIF registration requirements and SEBI regulations is critical to ensuring your fund operates legally and attracts credible investors.
A well-structured AIF not only opens doors to alternative asset classes but also builds investor trust, offers regulatory clarity, and scales your investment impact.
FAQs
1. Can one AIF invest in multiple sectors like real estate and startups?
No, SEBI mandates clear categorization based on the fund’s primary investment strategy. You must register separate AIFs for different asset classes or objectives.
2. What is the minimum investment required from each investor in an AIF?
For all categories, the minimum investment per investor is ₹1 crore, except for employees or directors of the fund, who can invest a minimum of ₹25 lakh.
3. Can foreign investors participate in AIFs in India?
Yes, foreign investors can invest in AIFs, subject to FEMA regulations and SEBI compliance. Many funds also target NRIs and institutional investors globally.