•   An AIF under the SEBI (Alternative Investment Funds) Regulations, 2012 can be established or incorporated in the form of a trust or a company or a limited liability partnership or a body corporate.
•   However, generally the AIFs registered with SEBI are in trust form.

AIFs may raise funds from any investor by way of issue of units. However, the AIFs must also meet the following conditions:

•   An AIF can launch multiple schemes and each scheme shall have a minimum corpus of INR 20 crores;
•   A scheme can have a maximum of 1,000 investors;
•   Each investor of an AIF must make a minimum investment of INR 1 crore; and
•   The fund manager shall maintain an interest of minimum 2.5% of the corpus or INR 5 Crores whichever is lower.

Applicants can seek registration as an AIF in one of the following categories, and in sub-categories as follows -

•   Category I AIFs:

o Venture capital funds (Including Angel Funds)

o SME Funds

o Social Venture Funds

o Infrastructure funds

•   Category II AIFs - private equity funds, debt funds, real estate funds, and funds focused on distressed assets.

Category III AIFs - focus on trading strategies, including hedge funds, public market investments, and complex derivatives. 

•   AIFs are essentially Private Equity or Private Debt Funds. Unlike mutual funds, AIFs invest directly in a business (through appropriate instruments) rather than trading in listed/rated instruments.
•   Mutual Funds are highly regulated investment vehicles. Typically, mutual funds invest in listed equities, rated debt instruments and other instruments permitted by regulator. The underlying instruments in mutual fund are highly liquid but volatile. In mutual funds the NAV, returns etc. in most cases are available on daily basis. Further, in open ended mutual funds exit is also easily possible.

·   A typical AIF invests in a business which is usually a long term commitment. Accordingly, the returns generated are linked to the operations of the business. Also, returns are linked to the profitability of a business’ operations. Further, the underlying businesses in AIF start generating surplus/returns only after reaching a certain stage/milestone and hence the returns in AIF follows a certain pattern based on underlying business. Hence, typically investments in AIF are close ended and illiquid. It’s not usually possible for an investor to exit from AIF investment until its term.  Since AIF are business investments, the returns in AIF are less volatile.

•   An AIF may raise funds from any sophisticated investor. The value cannot be less than INR 1 cr.
•   In case of investors who are employees or directors of the AIF or employees or directors of the Manager, the minimum value of investment shall be INR 25 lakhs.
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As per SEBI AIF Regulations Category I and II AIFs shall be close-ended with a minimum tenure of three years. However, schemes of Category III AIF can be open ended or close ended.