CAT III Alternative Fund: What are they? Are they risky? (2024)

FAQs

What is Category 3 alternative investment fund? ›

Category III AIFs invest in securities of listed as well as unlisted investee companies, derivatives, complex or structured products, or other AIF units. 2. These can be open-ended or closed-ended funds. For a closed-ended fund, the minimum tenure is three years.

Since alternatives are considered riskier investments, they often have the potential for higher returns compared to traditional investments.

Limited information: Unrated AIFs may not have the same level of disclosure as rated funds, making it difficult to gather the necessary information to conduct a thorough credit assessment. Illiquid assets: Unrated AIFs often invest in illiquid assets, which can be difficult to value and sell if needed.

It refers to any privately pooled investment fund, (whether from Indian or foreign sources), in the form of a trust or a company or a body corporate or a Limited Liability Partnership (LLP). Hence, in India, AIFs are private funds which are otherwise not coming under the jurisdiction of any regulatory agency in India.

Category 3 AIFS

Examples of this category are as follows: Hedge Funds. Private Investment in Public Equity Funds.

The minimum investment limit is Rs 1 crore for investors. For directors, employees, and fund managers, the minimum limit is Rs 25 lakh. Who regulates AIF in India? In India, AIF is regulated by the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012.

Equities and equity-based investments such as mutual funds, index funds and exchange-traded funds (ETFs) are risky, with prices that fluctuate on the open market each day.

Selecting The Right Alternative Investments

The Chief Investment Office recommends an allocation to Alternative Investments of 20%-30% for many investors.

According to SEBI, Alternative Investment Fund is for sophisticated investors. The risk involved is considered to be fairly high in these funds. However, when invested for a long period of time, the returns can also be higher.

Who should invest in AIF? ›

Who Can Invest in an AIF? Investors willing to diversify their portfolio can invest in AIFs if they meet the following eligibility criteria: Resident Indians, NRIs, and foreign nationals can invest in these funds. The minimum investment limit is Rs.

Real Estate Investment Trusts (REITs) are specific types of AIF that primarily focuses on income-generating real estate properties. REITs allow investors to participate in real estate assets without directly owning and managing the properties themselves.

Income (other than business income) from Category I and II is taxed in the hand of the investor as per their applicable tax rate whereas for Category III income is tax-free in the hands of the investor because Category III AIFs have not been accorded a pass-through status and as such onus to pay the tax lies with the ...

Cat 1 & Cat 2 AIF's are taxed as pass-through vehicles (from a tax perspective, it is considered that the investor has directly made the investment themself). Cat 3 AIF's are taxed at the fund level, based on the type of income (business income, capital gains and dividend).

Alternative investment funds (AIFs) are privately pooled investment funds that doesn't fall under the jurisdiction of SEBI (Securities and Exchange Board of India) or any other regulatory agencies in India.

Category III AIFs have not yet been accorded a Pass-through status. AIF has to comply with many regulatory requirements and guidelines set forth by the relevant authorities like SEBI, RBI, FEMA, etc. AIFs will have to submit reports on their activities on a quarterly basis.

Within AIF Category III, the continuing interest of the manager or the Sponsor must exceed 5% of the corpus or Rs. 10 crores, whichever is lower. In AIF Category II, the tax liability is to be borne by the investor. In AIF Category III, the fund itself is responsible for bearing the tax liability.

As per the regulator, AIFs are divided into three categories as Category I, Category II, and Category III. While the Category I AIFs invest in Venture Capital Funds, Angel funds and Infrastructure funds, Category II AIFs offer exposure to Private equity funds, Real estate funds and Debt funds.