An Alternative Investment Fund (AIF) is a privately pooled investment vehicle registered in India that collects funds from investors both Indian and foreign to invest according to a defined strategy. AIFs are regulated by SEBI and typically invest in assets like private equity, venture capital, real estate, and hedge funds.

In an AIF (Alternative Investment Fund), investment is open to all.

AIFs are classified into three categories based on their investment strategy and risk profile:

• Category I AIFs – Invest in sectors that promote economic growth, such as startups, early-stage venture capital projects, infrastructure, and SMEs. Includes Venture Capital Funds, Infrastructure Funds, and Social Venture Funds.
  

• Category II AIFs – Include Private Equity, Real Estate, and Debt Funds, and alternative debt instruments without any specific government incentives, which do not undertake leverage or borrowing other than to meet day-to-day operational requirements.

• Category III AIFs – Use leverage through investment in listed or unlisted derivatives and complex trading strategies like hedge funds, arbitrage, and derivative trading to generate short-term returns.

Each category follows SEBI regulations and has distinct risk-return characteristics.

Open-ended AIFs allow investors to subscribe to new units on a continuous basis. Closed-ended AIFs issue units for a limited period and have a fixed tenure.

Category I & II AIFs must be closed-ended with a minimum tenure of 3 years, extendable by 2 years with approval from two-thirds of unit holders (by investment value). Category III AIFs can be either open-ended or closed-ended. If closed-ended, they can also be extended for 2 years with the same approval requirement.

Taxation is applied at the investor level for Category I and II AIFs, meaning income from these funds will now be taxed according to the new income tax slabs, whereas it is applied at the fund level for Category III AIFs.