Alternative Investment Fund: Are you one of those investors looking for options beyond traditional investments like mutual funds, stocks, cash, or bonds? If so, then Alternative Investment Fund (AIF) might be the right investment option for you, as these investment options can offer higher returns compared to traditional investment. 

In India, there are over 900 registered AIFs, with a total amount raised of Rs. 8.3 trillion as of March 31, 2023, according to SEBI.

But, what exactly are Alternative Investment Funds and how does the taxation works in such funds. Keep reading to get all your answers and learn more about it!

Alternative Investment Fund

What is an Alternative Investment Fund?

Alternative Investment Fund are different from traditional investments and refers to privately pooled investment funds, that invest in alternative asset classes like hedge funds, private equity, venture capital, real estate, commodities, and other investment types. 

In India, the minimum ticket size for investing in any AIF is Rs. 1 crore, while directors, employees, and fund managers have a minimum investment amount of Rs. 25 lakh. AIFs can be set up as a company or a Limited Liability Partnership (LLP).

While AIFs come with higher risks compared to equity (in general), they offer opportunities for diversification, higher returns, and access to asset classes not easily available through traditional investments. 

These funds are quite popular among experienced investors who are willing to take higher risks in exchange for potentially higher returns. 

Usually, High Net Worth Individuals (HNIs) and institutions invest in AIFs as the investment amounts are substantially higher. However, there is an expectation that these funds will also become accessible to midsize retail investors in the future.

Types of Alternative Investment Funds (AIF)?

Understanding AIFs is easier when you know their categories, as per SEBI:

Category I: Primarily invests in start-ups, early-stage ventures, SMEs, or other sectors which govt. or regulators consider economically and socially viable.

Category II: Includes Alternative Investment Funds like private equity funds or debt funds. They don’t use leverage or borrowing except to cover their day-to-day operational expenses.

Category III: AIFs such as hedge funds, PIPE funds, etc. which employ complex or diverse trading, or aim for short-term funds for making short-term returns, or other open-ended funds. They may use leverage through investment in listed/unlisted derivatives. 

Who can invest in an AIF?

• Indian residents, NRIs, and foreign nationals can invest.
• Joint investors, such as spouses, parents, or children of investors, are allowed.
• Minimum investment limit is Rs. 1 crore for investors and Rs. 25 lakh for employees, directors, and fund managers.
• Most AIFs have a minimum lock-in period of 3 years.
• Maximum number of investors per scheme is limited to 1,000, with a cap of 49 in the case of angel funds.
• AIFs must be registered under SEBI (Alternative Investment Fund) Regulations, 2012.

What are some Tax Benefits of AIFs?

Taxation of AIFs depends and varies on their category: 

Categories I & II have a pass-through status, meaning income or loss (other than business income) generated by the AIFs is taxable in the hands of investors. In simple terms, capital gains tax applies to profits or losses made from the fund.

For Category III, income earned whether capital gain or business income will be taxable in the hands of the AIF at the fund level. In case you invest in them, investors receive earnings after this deduction.

Have you ever invested or tried to invest in Alternative Investment Funds?

Written By Shivani Singh

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