Category I AIFs invest in startups or early-stage ventures or SMEs or social ventures or infrastructure or other sectors. The government or regulators consider these sectors as economically and socially desirable. Following are the subcategories under Category I AIF:
Venture Capital Funds-
Venture capital funds primarily invest in startups and emerging businesses that have strong growth potential. Also, during the VCF launch, it specifies the sectors that the fund is targeting. Most importantly, venture capital is a kind of equity financing. In other words, VCFs provide funds to companies in exchange for an equity stake.
Additionally, venture capitalists also tend to participate in company operations. VCFs generate returns upon selling their stake in the companies. Also, angel funds are a subcategory of venture capital funds.
SME (Small and Medium Enterprises) Funds-
• As the name suggests, SME funds invest in micro, small and medium enterprises that are listed or unlisted. These companies raise debt through NBFC. While SME funds provide equity financing for these companies. Minimum investment of INR 1 Crore.
Infrastructure funds-
Infrastructure funds primarily invest in firms that develop infrastructure projects. These funds raise capital from private investors. The infrastructure projects include railways, roads, water, municipal solid waste, and renewable energy. The Government of India offers incentives and concessions for investment in infrastructure funds.
Following are some of the key features of infrastructure funds:
• Closed-ended funds with a minimum lock-in of three years and an option to extend for two years.
• With a minimum tradable lot of INR 1 crore, these can be listed on stock exchanges.
SEBI defines Category II AIFs as the funds that do not fall under Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements.
Following are the investment restrictions for Category II AIFs:
• Close-ended schemes with a minimum lock-in period of three years.
• Minimum corpus under each scheme is INR 20 crores.
• Minimum investment from an investor is INR 1 crore. However, for the employee or director of AIF, it is INR 25 lakhs.
• Funds in Category II can invest only in units of other AIFs or in unlisted companies.
Sub categories of AIF II
Private equity (PE Funds), Debt funds, Fund of funds
Category III AIFs apply diverse trading strategies and leverage by investing in listed and unlisted derivatives. They use arbitrage, derivatives trading, futures and margin trading strategies. Category III funds can be both close-ended and open-ended funds. They are less regulated than conventional investments. Hence they do not need to publish their information regularly. Also, the Government of India doesn’t give any incentive or concession for investment in these funds.
Sub catagories- Hedge funds,Private investments in Public equity (PIPE)