5.3 Alternative Investment Funds (AIFs) & SIFs

5.3 Alternative Investment Funds (AIFs) & SIFs

Quick Answer: An Alternative Investment Fund (AIF) is a privately pooled investment vehicle — from India or abroad — that raises funds from sophisticated investors for a defined investment policy, regulated under the SEBI (Alternative Investment Funds) Regulations, 2012 (notified May 21, 2012). Three categories exist. Minimum investor commitment is ₹1 crore (₹25 lakh for AIF/Manager employees and directors). The Specialized Investment Fund (SIF), introduced by SEBI in December 2024 with a framework circular dated February 27, 2025 (effective April 1, 2025), sits between MFs and AIFs with a ₹10 lakh minimum and is regulated under the mutual fund framework — introduced by a December 16, 2024 amendment to the 1996 Regulations and now carried into the SEBI (Mutual Funds) Regulations, 2026 — not under the AIF Regulations.

What an AIF Is

Under Regulation 2(1)(b) of the SEBI (AIF) Regulations, 2012, an AIF is any fund established or incorporated in India or abroad that:

• is a privately pooled investment vehicle;
• collects funds from sophisticated investors (Indian or foreign);
• invests according to a defined investment policy for the benefit of investors.

AIFs cannot raise funds from the public — only through private placement via a placement memorandum. They are NOT mutual funds, NBFCs, or insurance companies. The 2012 Regulations give SEBI a single framework covering venture capital, private equity, debt, hedge, social-venture, SME, and infrastructure funds.

Three Categories of AIF

Category I AIF

Funds with a positive spillover effect on the economy that the government encourages through concessions/incentives:

• Venture Capital Fund (VCF) — invests in early-stage, high-growth startups.
• SME Fund — invests in small and medium enterprises listed/unlisted.
• Social Venture Fund (SVF) — invests in businesses solving social/environment problems; minimum corpus only ₹5 crore.
• Infrastructure Fund — invests in infrastructure projects.
• Special Situation Fund — invests in distressed assets.
• Angel Fund — sub-category of VCF for angel investors; minimum investment by an angel investor is ₹25 lakh (over up to 5 years), minimum corpus ₹5 crore, max 200 angel investors.

Continuing interest of Manager/Sponsor: ≥2.5% of corpus or ₹5 crore, whichever is lower. Leverage not permitted (except short-term temporary ≤30 days, ≤4 occasions, ≤10% of investable funds).

Category II AIF

Funds that do not fall in Cat I or Cat III and do not leverage (except temporary). They get no special incentives:

• Private Equity (PE) Funds — invest in unlisted companies, growth/buyout transactions.
• Debt Funds — invest in debt of listed/unlisted companies, stressed assets, venture debt.
• Fund of Funds — invest in other AIFs.
• Private Investment in Public Equity (PIPE) — sometimes classified here or in Cat III.

Continuing interest: ≥2.5% of corpus or ₹5 crore, whichever is lower. Leverage not permitted. Single investee company limit: ≤25% of investable funds (up to 50% for Large Value Funds).

Category III AIF

Funds that employ complex or leveraged strategies, including trading in listed/unlisted derivatives or complex products:

• Hedge Funds — employ long-short, arbitrage, directional, macro, and leveraged strategies.
• PIPE Funds (when classified here) — private investment in public equity with derivatives hedging.
• Trading-focused funds.

Continuing interest: ≥5% of corpus or ₹10 crore, whichever is lower. Leverage permitted with investor consent, capped at 2x NAV. Open-ended or close-ended. Single investee limit: ≤10% of investable funds (up to 20% for LVF). Registration fee highest at ₹15 lakh.

Minimum Investment Thresholds (Verified)

Under Regulation 10(c) of the AIF Regulations, 2012 (as amended, latest consolidation dated July 20, 2024):

• General minimum investor commitment: ₹1 crore — across all three categories.
• ₹25 lakh for employees or directors of the AIF or of the Manager.
• Accredited investors (introduced by the 2021 amendment): the ₹1 crore minimum does not apply.
• Large Value Fund for Accredited Investors (LVF): each non-Manager/Sponsor investor must be accredited and commit ≥ ₹70 crore.
• Angel fund investors: ₹25 lakh minimum (over up to 5 years).
• Social Impact Fund investing in not-for-profit organisations on social stock exchanges: ₹2 lakh minimum (2022 amendment).
• Joint investors (spouse/parent/child): combined ₹1 crore (max 2 persons); other joint investors each need ₹1 crore.
• Minimum scheme corpus: ₹20 crore (₹5 crore for social-venture and angel funds).
• Max investors per scheme: 1,000 (200 for angel funds).

The Specialized Investment Fund (SIF) — A New Asset Class

SEBI amended the Mutual Funds Regulations, 1996 on December 16, 2024 to introduce the Specialized Investment Fund (SIF) as a new asset class that sits between mutual funds and PMS/AIFs. The detailed framework circular was issued on February 27, 2025, effective April 1, 2025.

SIF — Key Features

• Minimum investment: ₹10 lakh per investor, applied across all SIF strategies at the PAN level (not per scheme).
• The ₹10 lakh floor does not apply to accredited investors.
• Passive breaches due to NAV decline are not violations, but the investor can then only redeem the entire remaining amount.
• SIP/SWP/STP are permitted while maintaining the threshold.

Eligibility (Two Routes)

1. Route 1 (Track Record): The mutual fund has operated ≥3 years with average AUM ≥ ₹10,000 crore in the preceding 3 years.
2. Route 2 (Personnel): AMC appoints a CIO with ≥10 years' experience (managed ≥ ₹5,000 crore AUM) and a fund manager with ≥3 years' experience (managed ≥ ₹500 crore AUM).

Permitted Strategies (Long-Short Only)

• Equity-oriented: Equity Long-Short, Equity Ex-Top 100 Long-Short, Sector Rotation Long-Short.
• Debt-oriented: Debt Long-Short, Sectoral Debt Long-Short.
• Hybrid: Active Asset Allocator Long-Short, Hybrid Long-Short.
• Only one strategy per category. Unhedged short exposure via derivatives capped at 25% of net assets.

Structure & Costs

• Open-ended, close-ended, or interval. Close-ended/interval must be listed on stock exchanges.
• Distinct branding from the AMC's mutual fund (separate brand name and logo).
• Fees and expenses follow the mutual fund scheme-expense framework (the Base Expense Ratio caps described in Section 4.2).
• Distribution requires the certification SEBI/NISM prescribe for SIF: the February 2025 framework pointed to NISM-Series-XIII (Common Derivatives), and NISM has since launched a dedicated NISM-Series-V-D: Mutual Fund – Specialized Investment Fund Distributors examination (NISM communique dated July 14, 2026).

AIF/SIF Category Comparison Table

Reading the ladder: Mutual Funds (₹500) → SIF (₹10 lakh) → PMS (₹50 lakh) → AIF (₹1 crore) → LVF (₹70 crore). Each step up offers more customisation, less liquidity, and higher risk/return variance.

Eligibility & Risk Profile

AIFs target sophisticated investors who understand private-market illiquidity, concentration, leverage (Cat III), and a long lock-in (Cat I/II are close-ended with a minimum 3-year tenure). SIFs target MF-savvy investors ready for derivatives-based long-short strategies — more risk than a plain MF, less than a hedge fund. Both require the investor to certify sophistication (self-declaration + KYC), and both are distributed only by NISM-certified distributors — Series XXI-A for PMS, Series XIII / Series V-D for SIF, and Series XIX-A / XIX-B for AIF distribution. Note that NISM Series XXV-B does not by itself authorise a person to distribute PMS, AIF or SIF products; it certifies the non-core sales and support role inside a registered investment adviser.