What is an Alternative Investment Fund (AIF)?
An Alternative Investment Fund (AIF) is a privately pooled investment vehicle registered with SEBI. This lesson explains what that means, how an AIF raises money, the limits on who and how many may invest, and the risks that come with the structure.
What it is
An Alternative Investment Fund is a privately pooled investment vehicle registered with SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012. It collects money from investors and invests it on their behalf.
The word 'alternative' points to where the money goes: areas such as unlisted companies, private credit, real estate or complex trading strategies. Investors hold units of the fund. They do not own the fund's underlying investments directly.
Private, not public
An AIF may raise money only by private placement. Units are offered privately to investors through a document called the placement memorandum, not through a public issue or public advertisement.
The number of investors is limited too. One scheme of an AIF may have at most 1,000 investors, and accredited investors are not counted towards that number. Together, the two rules keep an AIF a privately offered vehicle and not a fund sold to the public at large.
Units are issued in dematerialised form, that is, held electronically and not as paper certificates.
How it differs from a mutual fund and from PMS
A mutual fund scheme is also pooled, but it is offered to the public. A portfolio management account is not pooled at all: it is managed individually in the investor's own name.
An AIF sits apart from both. It is pooled like a mutual fund scheme, but privately placed, and SEBI's standard minimum investment is ₹1 crore per investor. SEBI groups AIFs into three categories, which the next lesson covers.
The risks
The risks of an AIF are significant. Units are usually illiquid, so an investor cannot count on selling or redeeming them when money is needed. Tenures are long. Unlisted assets have no market price and are hard to value, so the value shown for a holding is an estimate until it is sold. And investors can lose capital.
Registration with SEBI means the fund operates under SEBI's regulations. It is not an assurance about returns.
Rules at a glance
How an AIF reaches an investor
Gaurav, 50, who runs an export business in Jaipur, hears about a fund that lends to mid-sized unlisted companies. He does not find it in a newspaper advertisement or a public offer. Because it is an AIF, its units are offered to him privately, through a placement memorandum that sets out the fund's terms.
If he invests, he becomes one of at most 1,000 investors in that scheme (accredited investors apart) and holds units in dematerialised form. He does not own the loans the fund makes. He also takes on the fund's risks: the units are illiquid, the term is long, and he could lose capital.
Key points
- An AIF is a privately pooled investment vehicle registered with SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012.
- It raises money only by private placement, through a placement memorandum.
- One scheme may have at most 1,000 investors; accredited investors are not counted.
- Units are issued in dematerialised form.
- Main risks: illiquidity, long tenure, uncertain valuation of unlisted assets and possible loss of capital.
Common misunderstandings
- An AIF is not a mutual fund sold to wealthier investors: a mutual fund scheme is offered to the public, while an AIF may raise money only by private placement.
- An AIF is not the same as PMS: an AIF pools investors' money and issues units, while a PMS account is managed individually in the investor's own name.
- SEBI registration is not a seal on returns: units are usually illiquid, unlisted assets are hard to value, and capital can be lost.
- The 1,000-investor limit is per scheme, and accredited investors are left out of the count.
Questions people ask
Can an AIF advertise for investors?
No. An AIF may raise funds only by private placement: units are offered privately through a placement memorandum, not through a public issue or public advertisement.
How many investors may one AIF scheme have?
At most 1,000. Accredited investors are not counted towards the limit.
What does an AIF invest in?
Areas such as unlisted companies, private credit, real estate or complex trading strategies, depending on the fund. What a particular fund may do depends on its category and its placement memorandum.
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.