Industry experts say the key difference lies in the type of investors they are meant for, the assets they invest in and the flexibility they offer fund managers.
Why AIFs are different from mutual funds
Stephen added that most AIFs are structured as close-ended funds with multi-year lock-in periods, unlike mutual funds that offer daily liquidity. This enables fund managers to invest in private market opportunities that conventional mutual funds cannot access.
Understanding SEBI's three AIF categories
According to experts, SEBI classifies AIFs into three categories based on their investment strategy, use of leverage and overall risk profile.
Karkera added that Category III funds typically deploy quantitative or trading-based strategies in listed markets, making them distinct from the private-market focus of Categories I and II.
With India's AIF industry managing commitments of more than ₹15 lakh crore, experts expect AIFs to play an increasingly important role in financing startups, private businesses and other alternative asset classes. However, they emphasize that these products remain suitable primarily for sophisticated investors who understand the risks associated with illiquid, long-term investments and can meet the minimum investment threshold.