Alternative Investment Funds (AIFs) in India are classified into three categories by SEBI. Each category serves different investment purposes and risk profiles. Here’s what every investor should know about Cat 1, Cat 2, and Cat 3 funds.
Category 1 (Cat 1) Funds
Category 1 funds invest in startups, early-stage ventures, and socially beneficial sectors. These include:
- Venture Capital Funds – Support new businesses and startups
- Angel Funds – Early-stage startup investments
- Infrastructure Funds – Roads, airports, and development projects
- Social Venture Funds – Socially responsible investments
Benefits: Tax pass-through status, government incentives, and long-term growth potential. Minimum Investment: ₹1 crore for most investors
Category 2 (Cat 2) Funds
Category 2 funds don’t get special incentives or tax benefits but follow standard investment rules. Types include:
- Private Equity Funds – Invest in established private companies
- Debt Funds – Focus on corporate bonds and loans
- Fund of Funds – Invest in other investment funds
- Real Estate Funds – Property and real estate investments
Features: No leverage restrictions, professional management, diversified portfolios. Minimum Investment: ₹1 crore
Category 3 (Cat 3) Funds
Category 3 funds use complex trading strategies and can employ leverage. These include:
- Hedge Funds – Use various strategies to generate returns
- Private Investment in Public Equity (PIPE) – Invest in listed companies
Characteristics: Higher risk, potential for higher returns, sophisticated strategies. Minimum Investment: ₹1 crore
Which Category Should You Choose?
Choose Cat 1 if you want tax benefits and believe in supporting startups and infrastructure development.
Choose Cat 2 for diversified private market exposure without complex strategies.
Choose Cat 3 if you’re comfortable with higher risk and want access to hedge fund strategies.
All AIF categories require substantial minimum investments and are suitable for high net worth individuals and institutions seeking portfolio diversification beyond traditional mutual funds and stocks.
This blog post is for information and educational purpose only. It should not be considered personalized investment advice.