AIF Foundation

SEBI permits employees of the AIF's Investment Manager (the AMC equivalent for AIFs) to invest at a reduced minimum of ₹25 lakh, alongside outside investors at ₹1 crore. This aligns interests — the team managing the fund has skin in the game.

Most Cat I and Cat II AIFs do not collect the full committed capital upfront. Instead, they "call" capital in tranches as investment opportunities arise. An investor with a ₹2 crore commitment may transfer ₹30-50 lakh on day 1, then receive call notices over the next 3-5 years to fund additional opportunities. This is operationally different from mutual funds (where money is invested immediately) and requires investors to maintain liquidity for future calls.

For Cat I and Cat II closed-ended AIFs, secondary exits are possible but limited — the AIF Manager may permit an investor to sell their commitment to another investor, subject to documentation and the existing investor base. Forced exits (mandatory redemption) are not available. This is fundamentally different from mutual funds and is why illiquidity is the headline risk of AIFs.

When the AIF generates returns, distributions follow a sequenced "waterfall": (1) return of invested capital to investors, (2) preferred return (often 8-10% IRR) on the invested capital, (3) catch-up to the Manager (allowing the Manager to "catch up" to an agreed share of profits), (4) carried interest split between investors and Manager (typically 80/20). The exact waterfall is defined in the AIF's Private Placement Memorandum (PPM).

Cat II private credit AIFs typically target 10-13% IRR with quarterly or semi-annual cash distributions, making them the closest AIF equivalent to a "steady income" strategy. The risk profile is higher than bank fixed deposits or debt mutual funds because the underlying borrowers are mid-market companies, not government bonds. Diligence on the AIF Manager's credit track record is essential.

Cat III AIFs typically use complex strategies (derivatives, shorting, leverage) that generate income types (such as F&O gains) which are administratively complex to allocate to investors. Taxing at the fund level simplifies the structure. The trade-off: net-of-tax returns are lower than they would be in a pass-through structure, and investors cannot offset Cat III losses against personal capital gains.

No. Cat I AIFs accept retail HNI investors at the standard ₹1 crore minimum. The "preferred" categorisation refers to the regulatory and tax incentives, not investor restrictions. Many Cat I VC funds in India today have 30-40% of capital from family offices and HNIs.

Yes — and for Ultra-HNIs this is the norm. A typical sophisticated AIF allocation spreads across 4-8 AIFs (mix of Cat I, II, III) to diversify manager risk, vintage risk, and strategy risk. Each AIF's ₹1 crore commitment is independent.