Alternative Investment Fund

What is an Alternative Investment Fund?

Alternative Investment Fund or AIF is a privately pooled investment vehicle that invests in alternative asset classes such as private equity, venture capital, hedge funds, real estate, commodities, and derivatives. Generally, HNIs (High net worth individuals) and institutions invest in the AIFs as the investment amount is substantially higher.


AIFs are regulated by the SEBI (Securities and Exchange Board of India). As per the SEBI (Alternative Investment Funds) Regulations, 2012, an AIF can be set up as a trust, a company, a limited liability partnership, or a corporate body. However, many of the AIFs that have been registered with SEBI are in the form of trusts.

Types of AIFs in India

AIFs can be further divided into three categories, such as: 

Category I AIF

This category of AIF invests in start-ups, early-stage ventures, social ventures, SMEs, or infrastructure or other sectors considered socially or economically beneficial by the government or regulators fall into this category. It may be further classified into: 

Venture capital funds (Including Angel Funds) – This fund specifically invests in start-up or early-stage ventures that have high growth potential.

SME Funds – Best for investors who want medium equity exposure. The schedule for the upper cap on equity is as follows: equity component is 50 percent up to age 35. Post that, it tapers down gradually to 40 percent at 40, 30 percent at 45, 20 percent at 50 to finally 10 percent by the age of 55.

Social Venture Funds – This fund invests in companies that aim to make a positive impact on society or the environment, such as sustainability, clean energy, etc. It has also generated favorable returns in the past. 

Infrastructure funds – This fund invests in infrastructure projects such as railways, bridges, airports, etc. 

Category II AIF

These are the AIFs that do not fall under categories I and III. They do not use leverage or debts other than to cover their day-to-day operational expenses. Some of the funds included in the Category II are as follows:

Private Equity Funds – It makes equity investments in unlisted companies and helps them to raise capital. As unlisted companies face problems in raising capital through debt or equity, private equity funds allow them to raise capital easily. 

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.

Fund of Funds – This fund invests in multiple AIFs. It doesn’t directly buy stocks or bonds. Instead, it invests in a portfolio of other investment funds. 

Category III AIF

These AIFs use complex trading strategies in their investment. It may use leverage or debt for investment in listed or unlisted derivatives. Some of the funds included in Category III are: 

Private Investment in Public Equity Fund (PIPE) – This fund invests in the equity of companies that are listed on the stock exchange. This often happens when the value of the company’s shares has dropped, and the company is looking to raise capital. Hence, in this case, AIFs receive the equity at a discounted price. 

Hedge fundHedge fund uses various investment strategies like short selling, arbitrage, futures, derivatives, and margin trading to generate maximum returns for the investor.

What is Mutual Fund

A mutual fund is a pool of money managed by a professional Fund Manager.

It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities. And the income / gains generated from this collective investment is distributed proportionately amongst the investors after deducting applicable expenses and levies, by calculating a scheme’s “Net Asset Value” or NAV. Simply put, the money pooled in by a large number of investors is what makes up a Mutual Fund.

How Mutual Fund Works

Here’s a simple way to understand the concept of a Mutual Fund Unit.
Let’s say that there is a box of 12 chocolates costing ₹40. Four friends decide to buy the same, but they have only ₹10 each and the shopkeeper only sells by the box. So the friends then decide to pool in ₹10 each and buy the box of 12 chocolates. Now based on their contribution, they each receive 3 chocolates or 3 units, if equated with Mutual Funds.
And how do you calculate the cost of one unit? Simply divide the total amount with the total number of chocolates: 40/12 = 3.33.
So if you were to multiply the number of units (3) with the cost per unit (3.33), you get the initial investment of ₹10.

This results in each friend being a unit holder in the box of chocolates that is collectively owned by all of them, with each person being a part owner of the box

What is NAV

Next, let us understand what is “Net Asset Value” or NAV. Just like an equity share has a traded price, a mutual fund unit has Net Asset Value per Unit. The NAV is the combined market value of the shares, bonds and securities held by a fund on any particular day (as reduced by permitted expenses and charges). NAV per Unit represents the market value of all the Units in a mutual fund scheme on a given day, net of all expenses and liabilities plus income accrued, divided by the outstanding number of Units in the scheme.

How Risk/Return trade-off by mutual fund category ?

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 An open-end fund is a mutual fund scheme that is available for subscription and redemption on every business throughout the year, (akin to a savings bank account, wherein one may deposit and withdraw money every day). An open ended scheme is perpetual and does not have any maturity date.

 Close- Ended Schemes

 A passively managed fund, by contrast, simply follows a market index, i.e., in a passive fund , the fund manager remains inactive or passive inasmuch as, he/she does not use his/her judgement or discretion to decide as to which stocks to buy/sell/hold , but simply replicates / tracks the scheme’s benchmark index in exactly the same proportion. Examples of Index funds are an Index Fund and all Exchange Traded Funds. In a passive fund, the fund manager’s task is to simply replicate the scheme’s benchmark index i.e., generate the same returns as the index, and not to out-perform the scheme’s bench mark.

What is a Systematic Investment Plan (SIP)?

Systematic Investment Plan (SIP) is an investment route offered by Mutual Funds wherein one can invest a fixed amount in a Mutual Fund scheme at regular intervals– say once a month or once a quarter, instead of making a lump-sum investment. The installment amount could be as little as INR 500 a month and is similar to a recurring deposit. It’s convenient as you can give your bank standing instructions to debit the amount every month.

SIP has been gaining popularity among Indian MF investors, as it helps in investing in a disciplined manner without worrying about market volatility and timing the market. Systematic Investment Plans offered by Mutual Funds are easily the best way to enter the world of