What is an AIF? Alternative Investment Funds in India Explained

An alternative investment fund (AIF) is a privately pooled investment vehicle, registered with SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012, that invests money from its investors under a defined investment policy. It is sold only by private placement, usually needs ₹1 crore per investor, and often locks your money in for several years. For the product overview, see Sanriya's AIF page.

AIF meaning: how SEBI defines it

The 2012 regulations, as amended up to 14 July 2026, define an AIF as a fund established or incorporated in India as a trust, a company, a limited liability partnership (LLP) or a body corporate that:

• pools money from investors, Indian or foreign, to invest under a defined investment policy for their benefit; and
• is not already covered by SEBI's mutual fund or collective investment scheme regulations, or any other SEBI regulation for fund management.

An AIF must hold a SEBI certificate of registration, may raise money only by private placement, and its founding document must bar public invitations to subscribe.

What is not an AIF

The definition excludes:

• mutual funds and collective investment schemes;
• family trusts set up for relatives, ESOP trusts, and employee welfare or gratuity trusts;
• holding companies, and special purpose vehicles not set up by fund managers, such as securitisation trusts;
• funds managed by asset reconstruction or securitisation companies registered with the RBI;
• any pool directly regulated by another Indian regulator.

A PMS is not an AIF either, because it is not pooled: under the SEBI (Portfolio Managers) Regulations, 2020, each client's securities sit in their own demat account.

How an AIF is structured: sponsor, manager and trustee

In practice most AIFs are trusts, and each trust deed must be registered under the Registration Act, 1908. Three parties matter:

• Sponsor: the person or persons who set up the AIF; the promoter for a company, the designated partner for an LLP.
• Manager: the entity appointed to manage the investments; it may be the same as the sponsor.
• Trustee: in a trust-form AIF, the trustee holds the fund for investors and approves, jointly with the manager, the policies that keep decisions within the regulations and the placement memorandum. In an Accredited Investors only fund, the manager carries out the trustee's duties.

The sponsor or manager must keep its own money in the fund: under regulation 10(d), at least 2.5% of the corpus or ₹5 crore, whichever is lower, and for Category III at least 5% or ₹10 crore, whichever is lower; this stake cannot be met by waiving management fees. The sponsor and manager act in a fiduciary capacity and must disclose conflicts of interest, and a SEBI-registered custodian must be appointed before the first investment. SEBI also bars the AIF, manager, trustee and sponsor from promising returns to investors.

What is a private placement memorandum (PPM)

The private placement memorandum is the AIF's offer document. It must cover the manager and key investment team, target investors, all fees and expenses, tenure, redemption conditions, strategy, risk management, conflicts of interest, disciplinary history and how the fund will be wound up. It must also show a worked example of fees and the distribution waterfall.

Except for Accredited Investors only funds and angel funds, the PPM is filed with SEBI through a SEBI-registered merchant banker at least 10 working days before launch (regulation 12(2), cut from 30 days by the Second Amendment Regulations, 2026, effective 14 July 2026). SEBI does not approve the PPM, and every PPM must say so. The manager must give you the PPM before you commit and take your acknowledgement, and the contribution agreement you sign cannot go beyond its terms.

AIF units, classes and your rights

You hold units, which represent your beneficial interest in the fund or scheme and must be issued in dematerialised form. A partly paid unit represents the share of your commitment already invested.

Every investor's rights in each investment and its proceeds are pro rata to their commitment, except where an investor was excused or excluded from a deal, defaulted on a drawdown, or shares profit with the manager as carried interest. Junior classes of units, which take lower returns or bear losses first, can be held only by the manager or sponsor, development finance institutions, State Industrial Development Corporations and government-owned entities. Other investors may receive differential rights only if they do not hurt other investors and are disclosed in the PPM.

Who can invest in an AIF: the ₹1 crore minimum and limits

SEBI's rules set these entry limits:

• ₹1 crore minimum per investor.
• ₹25 lakh for employees or directors of the AIF or its manager.
• Accredited investors are exempt from the ₹1 crore minimum. An individual qualifies through income or net worth tests, such as annual income of at least ₹2 crore, or net worth of at least ₹7.5 crore with ₹3.75 crore in financial assets. See accredited investors and lower minimums.
• Joint investment: you and your spouse, parent or child may invest jointly, at most two people, against a single ₹1 crore.
• Angel funds: since the September 2025 amendment they raise money only from accredited investors and the key personnel of the fund or its manager, with no minimum ticket; older angel funds have until 31 March 2027 to complete the switch.
• Scheme size: each scheme needs a corpus of at least ₹20 crore and may have at most 1,000 investors; since 19 November 2025 accredited investors are not counted towards that cap.

A Special Situation Fund needs at least ₹10 crore from each investor (₹5 crore for accredited investors), and a Large Value Fund, open only to accredited investors, needs at least ₹25 crore from each investor (reduced from ₹70 crore in November 2025).

What are the three AIF categories

Every AIF falls into one of three categories:

• Category I invests in start-ups, early-stage and social ventures, SMEs, infrastructure and other areas the government treats as socially or economically desirable. Sub-categories are venture capital, SME, angel, social impact, infrastructure and special situation funds.
• Category II is everything not in I or III, such as private equity and debt funds. Category I and II may borrow only for temporary funding or day-to-day operational needs: up to 30 days, on no more than four occasions a year, and within 10% of investable funds (regulations 16 and 17).
• Category III uses diverse or complex trading strategies and may use leverage, including derivatives, up to two times NAV under SEBI's circular of 29 July 2013.

Category I and II have pass-through tax status: income from their investments is taxed in your hands, while any business income is taxed at the fund level. Category III is taxed at the fund level. The detail is in AIF Category I, II and III compared.

Close-ended versus open-ended AIFs

Category I and II AIFs must be close-ended. You commit at the start, and money comes back as the fund sells investments, not when you ask. Category III schemes may be open-ended or close-ended. In an open-ended Category III scheme, your first lump sum must meet the minimum, NAV is disclosed monthly, and you redeem only on the PPM's terms; a close-ended Category III scheme discloses NAV quarterly.

How AIF commitments and drawdowns work

When you sign the contribution agreement, you commit an amount, say ₹1 crore. The fund's corpus is the total of all such commitments. The manager does not take your money on day one; it issues drawdown notices, also called capital calls, as investments come up, and your units stay partly paid until the commitment is fully called.

Points to note, which our guide to investing in an AIF covers step by step:

• Before the first close you may withdraw or reduce your commitment; after it, the contribution agreement binds you.
• If you miss a drawdown, the PPM sets out the consequences; SEBI's filing checklist expects it to say that a defaulting investor cannot take part in later investments until the default is cured.
• You may be excused from a specific investment if joining it would breach a law or an internal policy you disclosed upfront.

In practice, the uncalled part of your commitment has to stay available at short notice.

How long an AIF lasts and how it winds up

Category I and II schemes need a minimum tenure of three years (regulation 13(2)), and since SEBI's circular of 17 November 2022 tenure runs from the date of first close, which must come within 12 months of the scheme becoming eligible to launch. Tenure can be extended by up to two years with approval of two-thirds of unit holders by value (regulation 13(5)); an Accredited Investors only fund can extend by up to five years.

When tenure ends, the scheme gets a liquidation period of one year to sell what remains, after which it is wound up.

What happens to unsold investments at the end of an AIF

Most distributions are cash from exits. If some investments are still unsold during the liquidation period, investors can approve one of two routes. The first is distribution in kind (in specie): you receive the securities themselves, with approval of at least 75% of investors by value (regulation 29). The second is a dissolution period: extra time to sell, with no management fee. Either way, the manager must seek a bid for at least 25% of the unsold investments' value, which investors who voted against can use to exit in full. If investors approve neither route, the unsold investments are distributed in kind compulsorily, and if you decline them they are written off. This is a real risk: you may end up holding unlisted shares you cannot easily sell.

SEBI's investor charter for AIFs

Since 1 January 2022 every new PPM must carry SEBI's investor charter for AIFs, and since 10 February 2025 AIFs must comply with it. The charter commits the AIF to:

• seek your consent for a change in sponsor, manager or their control, material PPM changes such as strategy, and winding up before tenure ends;
• value Category I and II portfolios at least every six months (yearly with 75% approval by value);
• disclose material risks, fees and conflicts of interest;
• respond to your complaints within 21 days, with SEBI's SCORES platform and mediation, conciliation or arbitration available beyond that.

In return, you are expected to read the PPM and contribution agreement, keep KYC current, honour the agreement and keep confidential fund information private.

AIF vs mutual fund

Who an AIF is designed for

The rules point to one kind of investor: someone who can commit a large sum they will not need for many years, answer capital calls on time, and live with infrequent valuations. Category I and II funds can put up to 25% of investable funds in a single company (regulation 15(1)(c)), and capital can be lost in part or in full. Risks the charter asks AIFs to disclose include concentration, foreign exchange, leverage, realisation and strategy risk. AIFs do not suit emergency money or investors who need regular access to their capital.

How Sanriya Finvest works with AIF investors

Sanriya Finvest Pvt. Ltd., Pune, is an AMFI-registered mutual fund distributor (ARN-193359) and an APMI-registered PMS distributor (APRN01056). On AIFs we explain the structure, PPM, drawdowns and exit, handle KYC, contribution agreement and capital-call paperwork, and service the investment through its life. Our role is distribution, and the decision stays with you. The commission we receive for distributing an AIF is disclosed to you at onboarding, as SEBI requires, and we do not charge you a separate fee. AIF schemes are also required to offer a Direct Plan, which carries no distribution fee. Contact us to go through an AIF's documents together.