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An Alternative Investment Fund (AIF) is a privately pooled investment fund. AIFs are not regulated by any regulatory agency, in India. But they need to be registered under one of three categories. These categories are Category I, Category II, or Category III. Category I AIFs invest in start-ups. Category II AIFs invest in private debt or private equity. Category III AIFs invest in a range of assets. The objective of Category III AIFs is to generate alpha or superior risk-adjusted returns in the short term. Category III AIFs need to be open-ended. An open-ended fund is one where investors can exit the fund whenever they want to exit. Close-ended AIFs can get listed on stock exchanges too.
The main benefit of AIF is that it can generate higher returns. This is because AIFs invest in a range of assets, including private assets. They have more latitude regarding their investment strategies. It needs to be noted here that the risks of AIFs are also higher. So they are suitable for high-net-worth individuals and institutional investors.
Both individual investors and institutional investors can invest in AIFs. But due to minimum investment size requirements, small or retail investors usually do not invest in them.
Mutual funds are regulated entities while AIFs are unregulated entities. MFs usually invest in listed equity or debt. AIFs invest both in listed and non-listed, private assets. The minimum investment size in MFs is small. The minimum investment size in AIFs is bigger. MFs usually target retail investors. AIFs usually target high-net-worth individuals (HNIs) and institutional investors.
The minimum amount that you can invest in an AIF varies from AIF to AIF. But it is usually of a large size. For instance, hedge funds are the most prominent types of AIFs. In the US, the minimum investment amount in a hedge fund is usually $1 million.