What are Category II AIFs and who should invest

Alternative Investment Fund (AIF) is a growing asset class among investors seeking higher returns in exchange for higher risks. AIF is a privately pooled fund that operates under a clearly defined investment strategy and aims to generate returns. This special investment category is different from conventional investment instruments like equity, mutual funds, stocks, etc.

Types of AIFs:

The AIF is divided into category 1, category 2 and category 3. The Category I AIF invests in start-ups, early-stage ventures or other sectors with high growth potential. Category II AIF includes funds like private equity funds or debt funds that do not fall under categories I and III. On the other hand, hedge funds and private investment in public equity fall into the Category III AIFs. This article explores the Category II AIFs.

What are Category II AIFs?

Category II AIFs include private equity funds or debt funds that typically invest in a variety of instruments without borrowing, except for day-to-day operations.

The funds, permitted in the SEBI (Alternative Investment Funds) Regulations, 2012, are considered under this category. It includes multiple varieties of funds like real estate funds, private equity funds (PE funds), funds for distressed assets, etc.

Some of the funds included in the Category II AIFs are:

Private Equity Funds: A private equity fund makes investments in unlisted private enterprises. It is difficult for unlisted corporations to raise capital by issuing stock and debt securities, so these funds allow them to raise capital easily. It typically has a lock-in term of four to seven years.

Debt Funds: This fund primarily invests in debt securities from unlisted companies through debt instruments like bonds, debentures and others.

Fund of Funds: These funds do not have an investment portfolio but invest in different Alternative Investment Funds. It does not directly purchase stocks or bonds but instead invests in a portfolio of other investment funds.

Who Can Invest in an AIF?

Indian residents, NRIs and foreign nationals can invest in AIFs if they are willing to diversify their portfolios. The minimum investment for AIF is ₹ 1 crore, excluding directors, employees, and fund managers where it can be as low as ₹25 lakh. Additionally, these funds come with a minimum lock-in period of three years. The number of investors in these schemes is limited to 1000, except for angel funds.

Loading…