Alternative Investment Fund is a Fund which is incorporated or established in India. Nit sis a privately pooled vehicle which collects funds from investors for investing it in accordance with the defined investment policy for the benefit of its investors. They invest in venture capital, private equity, hedge funds, managed futures, etc.
It is described under section 2 (1)(b) of the Regulation Act, 2012 of Securities and Exchange Board of India (SEBI). AIF can be established in any form of company whether as a Private Limited Company, Limited liability partnership, Trust or any Corporate Company. Generally high net worth individuals invest in AIF as it requires high net worth unlike Mutual Funds.

SEBI has classified AIF into three broad categories and they are as follows-
Category I- These categories invests in Startups, Small and medium enterprises, and new business which have high potential and are considered as socially and economically viable. His category invest on a companies which have great plans for their future and if investors fins that effective and after listening to their plans if they feel that this company will earn profit in future only then they will invest in these kind of companies.
1.Category 1 comprises of Following Funds-
-Venture Capital Fund (VCF)- Venture Capitalist invest in the Companies which have high potential to perform and earn profits in the future but initially are facing economic/ investment crush in initial phase. It is difficult for a newly incorporated company to invest in capital market, therefore Venture Capital Funds becomes the most sought after solution for their investment needs.
-Infrastructure Fund- These Funds invests in the development of Public assets such as roads, rails, airports, communication assets etc. when you invest in infrastructure funds since there is low competition in this field one can easily earn capital growth and it can be divided also.
-Angel Fund- This is a type of Venture Capital funds which pools money from Angel Funds and invests in startups for their development. And as and when investors becomes lucrative investors get the dividend.
-Social Venture Funds- These Funds invests in Companies that have Strong social conscience and that aims to bring a real change in society. These companies focuses on making profits and also tries to solve by investing in environmental and social issues. Social venture funds generally invests in projects based out of developing countries as they have great potential for growth as well as Social change.
2. Category II- These categories invests in various equity securities and debt securities. All those funds which do not fall under Category I and III do fall in this category. There is no incentive is given by the government on these kind of category.
Category II comprises of Following Funds-
- Private equity funds (PE)- These invests in unlisted private companies and take ownership of those companies, since unlisted private companies cannot tap capital through issuance of equity or debt instrument, they also search for PE Funds. PE generally ahs fixed investment horizon ranging from 4 to 7 years. After 7 years it is expected to exit the investment with good amount of profit.
- Debt fund- These fund invest in listed as well as unlisted companies. These invests in a company which have high potential growth, good corporate practices but are facing capita crunch, so these types of companies are good option for Debt Funds. As per SEBI guidelines, Funds which are invested through debt Funds cannot be further utilized for the purpose of loans, as Alternative Investment fund is a privately pooled investment vehicle.
- Fund of Funds- It is a combination of various AIF. it should be noted that Funds for Funds under AIF cannot issue fund publicly, unlike fund of funds under Mutual funds.
3. Category III- Funds which aims at short term returns falls under this category. It comprises of following funds- - Hedge fund- these funds pools capital from institutional and accredited investors and invests in domestic as well as international market to generate high return. These funds are expensive related to other financial investment instrument. These funds charges 2 percent as the asset management fee and 20 percent of the profit which is earned a a fee.
- Private investment in public Equity fund (PIPE)- It is handled by Private Equity funds which are earmarked for Public Equity Investment. It basically means that buying shares of publicly traded stock +at a discounted price. This enables investors to purchase a stake in the company, while the company selling the stakes receives capital infusion to grow its business.