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SEBI categorizes Alternative Investment Funds (AIFs) into three main types: Category I (socially desirable, e.g., VCF, SME, Infra funds), Category II (PE, Debt funds, no leverage, residual category), and Category III (Hedge Funds, complex strategies, leverage allowed). Each category has distinct investment mandates, risk profiles, and regulatory requirements, with minimum investments set at ₹1 crore (or ₹25 lakh for employees). Here's a breakdown of each category:

Category I AIFs

Focus: Positive economic impact (e.g., startups, SMEs, infrastructure, social ventures). Examples: Venture Capital Funds, SME Funds, Social Venture Funds, Infrastructure Funds, Angel Funds, Special Situation Funds. Characteristics: Often receive incentives, close-ended, no leverage.

Category II AIFs
Focus: No specific government incentives, residual category. Examples: Private Equity Funds, Debt Funds, Fund of Funds. Characteristics: Cannot use leverage (except for operations), typically close-ended, no investment restrictions.

Category III AIFs
Focus: Diverse or complex trading strategies. Examples: Hedge Funds, Public Market Funds, PIPE Funds. Characteristics: Can use leverage (derivatives), open or close-ended, higher risk.

Purpose: To pool capital for alternative investments. Regulation: Governed by SEBI AIF Regulations, 2012.
Entry: High entry barrier (₹1 crore minimum) for sophistication. Investor Profile: Suited for accredited investors seeking diversification.