The three AIF categories.
SEBI sorts every AIF into one of three buckets. The category tells you what it can hold, how it is taxed and how liquid it is — far more than the brand name does.
One bucket each. Three very different rulebooks.
An Alternative Investment Fund is a privately pooled vehicle for sophisticated investors, with a ₹1 crore minimum across the board. The interesting part is the split: SEBI files every AIF into Category I, II or III, and that single classification decides the strategies it may run, whether it can use leverage, how its income is taxed and how long your capital stays locked. Get the category right and most other questions answer themselves.
A privately pooled fund for sophisticated investors
An AIF is a privately pooled vehicle with a ₹1 crore minimum across every category. It gathers capital from a small set of qualifying investors to run strategies a regular fund cannot.
The category SEBI assigns is what really matters: it decides the strategies a fund may run, whether it can use leverage, how its income is taxed and how long your capital stays locked.
What each one is built to do.
Backing what the economy wants
Close-ended trusts that lock capital while young companies or projects mature.
- Venture capital & angel funds
- SME and start-up funds
- Infrastructure funds
- Social-impact funds
- Leverage
- No investment leverage permitted — only short-term borrowing for operating needs.
- Taxation
- Pass-through. Gains flow to you and are taxed in your hands, not at the fund.
- Tenure
- Long, typically 7–10 years with a multi-year lock-in.
Who it suits — Patient capital chasing early-stage upside in government-encouraged sectors.
Private markets and private credit
The default bucket: anything that is not Category I or III, drawn down over time against commitments.
- Private equity funds
- Private credit & venture-debt
- Real-estate funds
- Pre-IPO and fund-of-funds
- Leverage
- No leverage beyond day-to-day operating requirements.
- Taxation
- Pass-through. Income is taxed in your hands at your own slab or capital-gains rate.
- Tenure
- Defined lock-in, commonly 5–8 years with periodic distributions.
Who it suits — Investors wanting unlisted equity, credit or property exposure with a clear horizon.
Long-short and hedge strategies
Often open-ended on listed markets, using leverage and derivatives to shape exposure.
- Long-short equity
- Absolute-return strategies
- Arbitrage & PIPE
- Listed-equity tactical
- Leverage
- Leverage and listed or unlisted derivatives are allowed, within SEBI limits.
- Taxation
- Taxed at the fund level before money reaches you — no full pass-through today.
- Tenure
- Frequently open-ended, with periodic redemption windows rather than a hard lock.
Who it suits — Sophisticated investors seeking hedged, market-aware equity returns.
The whole rulebook on one screen.
The same six questions, answered for each category. Use it to sanity-check any AIF a distributor puts in front of you — if the pitch and the category disagree, ask why.
| Attribute | Category I | Category II | Category III |
|---|---|---|---|
| Core strategies | VC, SME, infra, social | PE, private credit, real estate | Long-short, hedge, arbitrage |
| Leverage | Not permitted | Operating needs only | Allowed (with derivatives) |
| Taxation | Pass-through | Pass-through | At the fund level |
| Typical tenure | 7–10 yrs | 5–8 yrs | Open / rolling |
| Liquidity | Locked | Locked | Periodic windows |
| Minimum ticket | ₹1 cr | ₹1 cr | ₹1 cr |
Pass-through (I & II) keeps tax out of the fund, so your reported gains are pre-tax and taxed once, in your hands.
Fund-level tax (III) means distributions arrive already taxed at the fund — compare these returns net, not gross.
Read the category before you read the pitch.
Leverage, tax treatment and lock-in are decided the moment a fund picks its category — long before any deck reaches you. Know the bucket and you already know how the money can behave.
The category shapes the risk, not the brand name
Two funds with similar marketing can sit in different categories and behave nothing alike. Category II holds the most money — private equity, private credit and real estate — while Category III is the fastest growing.
Leverage, tax treatment and lock-in are all decided the moment a fund picks its category. Know the bucket and most other questions about how the money can behave answer themselves.
The AIF category questions we hear most.
Why does the category matter more than the fund's brand name?
The category is set by SEBI and governs what the fund can hold, whether it can borrow, how it is taxed and how long your money is locked. Two funds with similar marketing can sit in different categories and behave nothing alike — so the category, not the name, tells you the real shape of the risk.
What does pass-through taxation actually mean for me?
In Categories I and II, income earned by the fund (other than business income) is not taxed at the fund. It passes through and is taxed in your hands, at the rate that applies to that income type. You carry the reporting, but you avoid a second layer of tax inside the structure.
Why is Category III taxed differently?
Category III does not enjoy full pass-through status today. Because these funds trade actively and use leverage and derivatives, tax is generally computed and paid at the fund level before distributions reach you. The number you receive is already post-tax at the fund, which changes how you compare headline returns.
Which category holds the most money?
Category II is by far the largest, at roughly ₹11.6 lakh crore of commitments as of December 2025 — most of the private equity, private credit and real-estate capital sits here. Category III is the fastest growing, with commitments up about 43% in the year to December 2025.
Can a single AIF span more than one category?
No. Every AIF registers under exactly one of the three categories, and its permissions follow from that. A manager who wants both a venture strategy and a long-short strategy runs them as separate funds with separate registrations.
Is a higher category number riskier?
Not in a straight line. The numbers describe strategy type, not a risk ranking. A Category I venture fund can lose your whole ticket on a failed start-up, while a hedged Category III strategy may aim to dampen swings. Read the mandate and the leverage, not just the digit.
See the AIFs we track, scored.
Educational only, not investment advice. Figures are current to FY2025-26 and may change. AIF investments are subject to market risks; read all scheme documents carefully.