The Types of AIF: Categories I, II and III, explained
"AIF" is not one thing. SEBI sorts Alternative Investment Funds into three categories, and within them several quite different strategies, from backing startups to running hedge-style bets. This guide explains what each category actually holds, and how they differ in risk, liquidity and structure.
The three categories
Every AIF is registered under one of three categories, defined by what it invests in and how. The category tells you a great deal about the risk you are taking and the rules the fund must follow.
Source: SEBI, recognised AIFs
Category I: the funds the regulator encourages
Category I AIFs invest in areas seen as good for the economy, and sometimes receive favourable treatment. They are usually closed-ended with long lock-ins. Within it sit:
- Venture Capital Funds
- Back early-stage and growth startups.
- Angel Funds
- A sub-type of VC fund pooling smaller cheques from angel investors into very early startups.
- SME Funds
- Invest in small and medium enterprises.
- Social Venture / Impact Funds
- Invest for a social return alongside a financial one.
- Infrastructure Funds
- Invest in infrastructure projects and assets.
Category II: the broad private-markets middle
Category II is the catch-all and by far the most common. It covers funds that do not fit Category I or III and do not use leverage beyond day-to-day needs. This is where most AIF money in India sits. Within it:
- Private Equity Funds
- Take stakes in private, unlisted companies.
- Private Credit / Debt Funds
- Lend to companies, often at higher yields and higher risk than listed debt.
- Real Estate Funds
- Invest in real estate projects and assets.
- Distressed Asset Funds
- Buy stressed or distressed assets and debt.
- Funds of Funds
- Invest across other AIFs rather than directly.
Category III: the complex, actively-traded end
Category III AIFs run sophisticated strategies and are the only category permitted to use leverage and complex derivatives freely. They can be open or closed-ended and trade both listed and unlisted markets. Within it:
- Long-short and hedge-style funds
- Bet on prices rising and falling, often with leverage.
- Arbitrage and quant strategies
- Exploit pricing gaps or run rules-based trading.
- PIPE funds
- Private investment in public equity, buying large stakes in listed companies.
Category III also has its own tax treatment, which differs from the other two and is worth checking, since it can affect your net return meaningfully.
How they differ, at a glance
What to check
- Confirm the AIF and its category on the SEBI recognised intermediaries page (select Alternative Investment Funds).
- Match the category to your appetite: Category I and II lock money up for years, Category III can use leverage and swing harder.
- Read the Private Placement Memorandum for the exact strategy, lock-in, fees and tax treatment, which differs by category.
See: the AIF Manager, who runs the fund →
See: negotiating PMS and AIF fees like a veteran →
An AIF is a category, not a single thing, and the category tells you most of the story.
Backing a startup fund, a private credit fund and a leveraged hedge-style fund are three very different decisions wearing the same three letters. Knowing the category is the first step to knowing what you are actually taking on.
This guide describes how these funds are classified. It isn't a recommendation to invest in any category or fund. AIFs are complex, illiquid, high-minimum products for sophisticated investors, and the category is where the real differences begin.