Alternative Investment Funds (AIFs) in India are privately pooled investment vehicles regulated by the Securities and Exchange Board of India (SEBI). They are categorized into three types based on their investment strategies and objectives.

Category I AIFs include funds that invest in start-ups, small and medium enterprises (SMEs), infrastructure, social ventures, and other sectors considered socially or economically desirable. These funds often receive incentives from the government due to their positive impact on economic growth.

Category II AIFs comprise private equity funds, debt funds, and funds for distressed assets that do not fall under Category I or III. These funds generally invest in sectors or assets without government incentives and are allowed to employ diverse investment strategies, excluding borrowing, except for day-to-day operations.

Category III AIFs are hedge funds or funds employing complex or diverse trading strategies like leverage and short-selling to generate returns. These funds often take higher risks and seek to deliver high returns for accredited investors.

Each type of alternative investment funds in India must adhere to SEBI regulations concerning minimum corpus, investor eligibility, and disclosure requirements. Understanding these categories helps investors choose suitable funds aligned with their risk appetite and investment goals.