The term "alternative investment fund" refers to a group of pooled investment funds that invest in venture capital, private equity, hedge funds, controlled futures, and other types of investments. In simple terms, an AIF is a form of investment that is distinct from traditional investment options such as stocks, bonds, and other debt securities.
Regulation 2 (1) (b) of the Securities and Exchange Board of India's Regulation Act, 2012 defines an Alternative Investment Fund (SEBI). AIFs may be formed as a corporation, a trust, or a Limited Liability Partnership (LLP). Generally, high-net-worth individuals and institutions invest in AlF Funds because, unlike Mutual Funds, they require a large initial investment.
According to the Securities and Exchange Board of India (SEBI), AIFs are classified into three broad categories:
Category I: Funds that invest in StartUps, Small and Medium Enterprises (SMEs), and new businesses which have high growth potential and are considered socially and economically viable, are part of this category. The government promotes and incentivizes investment in these projects as they have a multiplier effect on the economy in terms of growth and job creation. These funds have been a lifeline to already thriving startups starving for capital.
Venture Capital Fund (VCF)
Venture Capital Funds invests in StartUps that have high growth potential but facing an investment crunch in the initial phase and need funding to establish or expand their business. Since it is difficult for new businesses and entrepreneurs to raise funding through the capital markets Venture Capital Funds become the most sought-after solution for their financing needs. VCFs pool in money from investors who want to make equity investments in ventures. They invest in multiple startups, depending on their business profiles, assets’ size, and phase of product development. Unlike mutual funds or hedge funds, venture capital funds focus on early-stage investment. Each investor gets a share of the business the VCF has invested in proportional to their respective investment. High Net Worth Investors (HNIs) who seek high risk-high return investment options prefer to invest in VCFs. After the inclusion of VCFs in AIFs, HNIs from abroad are also able to invest in VCFs and contribute to the growth of the economy.