Founder, Underpitch · Source review includes AMFI, SEBI, NSE, RBI, IRDAI, exchange, company or insurer documents where relevant.
2 July 2026
Category I AIFs cover specified areas such as venture capital, SME, infrastructure and social-impact strategies. Category II broadly includes private-equity, private-credit and similar funds that do not fit Category I or III and generally do not use leverage except as permitted for temporary needs. Category III can use complex strategies, derivatives and leverage subject to rules.
Key points
- Category describes the regulatory bucket, not whether a fund is good or safe.
- Category I and II strategies are often close-ended and illiquid.
- Category III can include long-only, long-short or trading-oriented strategies.
- Read the exact sub-category and placement memorandum.
Category I
Category I supports specified sectors or activities recognised in the regulations, including venture capital, SME, infrastructure and eligible social-impact structures. Risk can still be high because investments may be early-stage, unlisted or project-dependent.
Category II
Category II is the broad home for many private-equity and private-credit funds. These funds generally avoid routine leverage but can still have substantial company, credit, concentration, valuation and exit risk.
Category III
Category III funds may employ complex or diverse trading strategies and can use derivatives or leverage within the applicable framework. Strategies can behave very differently, so category alone says little about downside risk.
Worked Indian example
A venture-capital fund investing in early-stage businesses can be Category I, a private-credit fund can be Category II and an equity long-short fund can be Category III. All three are AIFs, but their return drivers, liquidity and failure modes are completely different.
Comparison table
| Category | Common examples | Leverage/strategy tendency | Main risks |
|---|---|---|---|
| Category I | Venture capital, SME, infrastructure, social impact | Specified developmental or sector strategies | Early-stage failure, project and exit risk |
| Category II | Private equity, private credit, real-estate credit | Generally no routine leverage except permitted temporary needs | Illiquidity, credit, valuation and concentration |
| Category III | Long-short, hedge-style, complex listed strategies | May use derivatives and leverage under rules | Market, leverage, model and liquidity risk |
This is a simplified educational comparison. Current regulations and each placement memorandum control.
Risks and limitations
- Funds in the same category can have completely different strategies.
- Private-asset valuations can lag economic deterioration.
- Leverage can magnify both gains and losses.
- Category labels do not replace due diligence on the manager and portfolio.
Frequently asked questions
Which AIF category is safest?
No category is automatically safest. Risk depends on the actual strategy, holdings, leverage, liquidity and manager.
Is private credit always Category II?
Many private-credit AIFs are Category II, but verify the registration and placement memorandum.
Can Category III invest only in stocks?
No. The permitted universe can include listed or unlisted securities, derivatives and structured products subject to rules and documents.
Are Category I funds low risk because they support development?
No. Venture, SME and infrastructure investments can be highly risky and illiquid.
Sources and methodology
Rules, thresholds and product terms can change. Verify the latest official material and product documents before relying on a figure.
This page is for education and product understanding. It is not a personalised investment, legal, tax, trading or buy/sell recommendation. Stocks, derivatives, PMS and AIFs can result in partial or total capital loss.