What is an Alternative Investment Fund (AIF)?

AIFs were introduced by SEBI in 2012 to formalise the private pooled investment industry that had previously operated under various exemptions. The structure is fundamentally different from a mutual fund or PMS in three ways. First, the investor base is restricted: AIFs cannot be marketed to retail investors and the ₹1 crore minimum is a regulatory floor that classifies investors as financially capable of bearing higher complexity, illiquidity, and drawdowns. Second, the asset universe is broader: AIFs can invest in unlisted companies (venture capital and private equity), private debt, real estate projects, distressed assets, and run hedge-style strategies — none of which are accessible through mutual funds. Third, the structure is typically closed-ended: most Cat I and Cat II AIFs commit investor capital for 5-10 years with periodic distributions back to investors as the underlying assets mature. Cat III AIFs are often open-ended with quarterly windows but can also have lock-ins. Operationally, AIFs require investors to handle capital calls (the AIF draws down committed capital in tranches as opportunities arise rather than collecting all upfront), distribution waterfalls (returns are paid back per a defined sequence — return of capital first, then preferred return, then carried interest), and complex annual tax reporting. AIFs are appropriate only for Ultra-HNIs, family offices, and institutions that can absorb illiquidity, complexity, and the capital-call commitment cycle.