Alternative Investment Funds (AIFs): notes for bank exams

At a glance

An Alternative Investment Fund is a privately pooled vehicle that collects money from sophisticated investors and invests it under a stated policy. It covers venture capital, private equity, private credit and hedge funds, which are outside mutual funds and portfolio management. SEBI regulates AIFs, and the government increasingly uses them to channel public money into startups and small firms.

Key facts

Regulator: SEBI (Chairman Tuhin Kanta Pandey)
Rules: SEBI (Alternative Investment Funds) Regulations, 2012
Legal form: trust, company, LLP or body corporate
Categories: I, II and III
Minimum investment: ₹1 crore per investor (₹25 lakh for employees or directors of the manager); accredited investors are exempt
Minimum corpus: ₹20 crore per scheme
Maximum investors: 1,000 per scheme (accredited investors outside this cap)
Large Value Fund threshold: ₹25 crore per investor (cut from ₹70 crore in 2025)
Fund of Funds for Startups (FFS): ₹10,000 crore, launched 2016 under Startup India, managed by SIDBI
Second FFS: ₹10,000 crore, announced in Budget 2025-26 and approved in 2025, focused on deep-tech and early-stage startups
SME Growth Fund: ₹10,000 crore, approved by the Cabinet on 6 October 2026

How it works

Category	What it invests in	Leverage	Examples
Category I	Sectors the government sees as socially or economically desirable	Not allowed (only temporary borrowing)	Venture capital funds, angel funds, SME funds, social impact funds, infrastructure funds
Category II	Anything not in I or III; no special incentives	Not allowed (only temporary borrowing)	Private equity funds, debt and private-credit funds, fund of funds
Category III	Diverse or complex trading strategies, including listed derivatives	Allowed within SEBI limits	Hedge funds, long-short funds, PIPE funds

Category I and II funds must be close-ended with a minimum tenure of three years; Category III can be open-ended.

Fund of funds route. Government money usually does not go to companies directly. A fund of funds such as SIDBI's FFS commits capital to SEBI-registered AIFs, which then invest in startups along with private money. Under the first FFS, about ₹10,900 crore was committed to some 140 AIFs.

Accredited investors. Since 2021 individuals and entities meeting income or net-worth tests can be certified as accredited investors by depositories, letting them invest below the ₹1 crore minimum and in "accredited-investor-only" schemes (introduced by a November 2025 amendment).

Recent developments

6 Oct 2026: The Cabinet approved a ₹10,000 crore government commitment for the SME Growth Fund, which will invest equity in small and medium manufacturing firms, including those in Tier-II and Tier-III clusters, through an AIF. It was announced in the Union Budget 2026-27.
18 Nov 2025: SEBI amended the AIF Regulations to create accredited-investor-only funds and schemes.

Exam traps

AIFs are regulated by SEBI, not the RBI; the RBI regulates SIDBI, which manages the startup fund of funds.
Hedge funds are Category III; venture capital and angel funds are Category I; private equity and debt funds are Category II.
Only Category III may use leverage for investing.
Minimum ticket is ₹1 crore, not ₹1 lakh; minimum corpus is ₹20 crore.
The startup FFS (2016) is run by SIDBI, not by NABARD or SEBI.

Quick check

Q: Under which regulations are AIFs governed? A: SEBI (Alternative Investment Funds) Regulations, 2012.
Q: In which category of AIF do hedge funds fall? A: Category III.
Q: Which institution manages the Fund of Funds for Startups? A: SIDBI.

Alternative Investment Funds (AIFs)