Types of Alternative Investment Funds As per the Securities and Exchange Board of India

Category I AIF: This category focuses on investments in Small and Medium Enterprises (SMEs), startups, social ventures, early-stage companies, or other sectors deemed economically beneficial by the government. It comprises,

• Venture Capital Funds: This fund invests especially in start-up or early-stage ventures that have high growth potential.
• Social Venture Funds: This fund invests in companies that make a positive impact on the environment and society such as green energy and sustainability.
• Infrastructure Funds: This type of investment invests in in infrastructure development projects like railways, bridges, dams, airports, etc…,

Category II AIF: This category includes funds investing in equity and debt securities, as well as those not falling under Category I or III. Government concessions are not provided for Category II AIFs. It encompasses:

• Funds of Funds: This fund invests in multiple AIFs, this will not buy stocks and bonds directly instead they invest in a portfolio of other investments.
• Private Equity Funds: This fund invests in unlisted companies and helps them to raise capital. Because unlisted companies face problems in raising capital through debt or equity, private equity funds help them pool the capital for their business.
• Debt Funds: This fund invests in the debt securities of the unlisted companies via debt instruments such as bonds, debentures, and other fixed-income instruments.

Category III AIF: These funds aim for short-term returns and employ complex trading strategies. No specific concessions or incentives are provided by the government. Some funds in this category include:

• Private Investment in Public Equity Fund (PIPE): This fund invests in the equity of companies listed on the stock exchange. Such investments typically occur when the value of the company’s shares has declined, and the company seeks to raise capital. Consequently, AIFs acquire the equity at a discounted price in such instances.
• Hedge fund: A hedge fund employs various investment strategies, including short selling, arbitrage, futures, derivatives, and margin trading, to generate maximum returns for investors.