Lesson 2 of 3 · AIF Categories — A Closer Look

Category II — Private Equity, Private Credit and Real Estate Funds

Category II is the residual AIF category: private equity, private credit and real estate funds are the usual examples. This lesson covers what falls in it, why a REIT does not, and the limits on concentration and borrowing that apply.

Fact-checked 8 October 20263 practice questions in the game

What falls in Category II

Category II covers AIFs that fall in neither Category I nor Category III and that do not use leverage beyond what the rules permit. It is defined by exclusion, so it takes in a wide range of funds.

Private equity funds, private credit (debt) funds and real estate funds are the usual examples. An infrastructure fund, by contrast, is Category I, and a hedge fund using complex trading strategies is Category III.

A REIT is not an AIF

Real estate can be held through more than one kind of vehicle, and they are easy to confuse. A real estate fund that is privately placed under the AIF Regulations is a Category II AIF.

A real estate investment trust (REIT) is something else. It is a separately regulated listed vehicle with its own SEBI regulations, and it is not an AIF. The rules in this lesson, including the minimum investment of ₹1 crore, are AIF rules and do not describe a REIT.

The concentration limit

A Category II fund may invest not more than 25% of its investable funds in a single investee company. The same limit applies to Category I funds; for Category III the figure is 10%.

The limit is 50% for large-value funds for accredited investors, a class of fund in which the minimum investment per investor is ₹25 crore. The cap limits how much of a fund can depend on one company. It does not remove the risk of loss.

Borrowing only for temporary needs

A Category II fund may not use borrowed money as part of its strategy. Like a Category I fund, it may borrow only for temporary funding and day-to-day operational needs, and three conditions apply together: the borrowing may run for not more than 30 days, on not more than four occasions in a year, and for not more than 10% of investable funds.

This is one of the lines between Category II and Category III: leverage as a lasting part of a strategy is open only to Category III funds.

Structure and risks

Category II funds are close-ended with a minimum tenure of three years, so units cannot be redeemed at will. Returns are not assured. In a private credit fund, borrowers can default; in any Category II fund, investors face illiquidity, valuation uncertainty and possible loss of capital.

Rules at a glance

DefinitionAIFs in neither Category I nor Category IIISEBI (Alternative Investment Funds) Regulations, 2012

Investment in a single investee companyNot more than 25% of investable fundsSEBI (Alternative Investment Funds) Regulations, 2012; 50% for large-value funds for accredited investors

Borrowing: purposeOnly temporary funding and day-to-day operational needsSEBI (Alternative Investment Funds) Regulations, 2012

Borrowing: limitsNot more than 30 days; not more than four occasions in a year; not more than 10% of investable fundsSEBI (Alternative Investment Funds) Regulations, 2012

Structure and tenureClose-ended; minimum tenure of three yearsSEBI (Alternative Investment Funds) Regulations, 2012

Worked example

The two percentage limits in rupees

Assumption of this example: a Category II AIF, not a large-value fund, has investable funds of ₹400 crore.
Most it may invest in a single investee company: 25% × ₹400 crore = ₹100 crore.
Most it may borrow to meet a temporary funding need: 10% × ₹400 crore = ₹40 crore, for not more than 30 days, and on not more than four occasions in a year.

Result. On these figures the fund may put at most ₹100 crore into any one investee company and may borrow at most ₹40 crore at a time for a temporary need. A large-value fund for accredited investors with the same investable funds could invest up to 50% × ₹400 crore = ₹200 crore in one company.

Key points

Category II: funds in neither Category I nor Category III, such as private equity, private credit and real estate funds.
A REIT is a separately regulated listed vehicle, not an AIF.
Not more than 25% of investable funds in a single investee company (50% for large-value funds for accredited investors).
Borrowing only for temporary needs: up to 30 days, four occasions a year and 10% of investable funds.
Category II funds are close-ended; risks include default by borrowers, illiquidity, valuation uncertainty and loss of capital.

Common misunderstandings

A REIT is not a Category II AIF: it is a separately regulated listed vehicle with its own SEBI regulations.
An infrastructure fund is not Category II: it is a sub-category of Category I.
Category II funds cannot run a leveraged strategy: borrowing is allowed only for temporary needs, within the 30-day, four-occasion and 10% limits.
The 25% cap does not make a fund safe: it limits concentration in one investee company but does not remove the risk of loss.

Questions people ask

Is a real estate fund an AIF?

A real estate fund that is privately placed under the AIF Regulations is a Category II AIF. A REIT is not an AIF; it is a separately regulated listed vehicle.

For how long may a Category II AIF borrow?

For not more than 30 days at a time, on not more than four occasions in a year, and for not more than 10% of investable funds, and only for temporary funding and day-to-day operational needs.

How much may it invest in one company?

Not more than 25% of its investable funds in a single investee company. The limit is 50% for large-value funds for accredited investors.

What this lesson relies on

SEBI (Alternative Investment Funds) Regulations, 2012 (as amended to 14 July 2026)
SEBI Master Circular for Alternative Investment Funds, 3 June 2026 (as updated)

This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.