What Is Category 1 AIF Investment, and Why Is It Beneficial?

Introduction: What Is AIF In Simple Terms?

Mutual funds are already a popular investment option among retail investors. But HNIs do not follow this norm. They invest in private equity options like venture capital, startups, and debt funds to grow their wealth. It comes with a 2025 report with India's major High-net worth individuals (HNIs) doubling their investments in AIFs. But what does AIFs mean?

In simple terms, Alternative Investment Funds (AIFs) are pooled funds from HNI investors, which are later invested in a series of asset classes (Category I, II, and III). More than baskets, they allow you to go beyond the traditional assets like stocks, bonds, and invest in private equity options.

As you read further, explore why more than ₹40,000 crore investment was made in AIF Cat I, the types of funds in Category I AIF, its benefits, taxation, and whether you should invest in them or not.

Keep reading to learn the unheard but equally potent benefits of Category 1 AIF.

What Is Category I AIF?

Category 1 AIF is a special type of Alternative Investment Fund that focuses on nation-building, upliftment, and long-term economic growth. As a result, this category allows you to invest in funds like:

• Startups & Early-Stage Ventures (Venture Capital Funds)
• Angel Funds
• Small & Medium Enterprises (SME Funds)
• Special Situation Fund
• Infrastructure Projects
• Social Venture Funds (impact-driven investments)

These types, including Category AIF II, are close-ended funds. It means there is a minimum tenure of 3 years and a maximum of 5 years (only for Angel funds). Overall, all of them include projects that are socially or economically desirable to the government or regulators.

The AIF Category 1 also allows cross-investments (but within limits). It can invest in another fund of the same sub-category, but cannot invest in "fund of funds (FoF)" structures under Category I. For example, a venture capital fund can invest in another venture capital fund.

In addition to that, Category I AIFs also cannot borrow money or use leverage, except for short-term borrowings.

Note: All the investments made in the AIFs have a minimum corpus limit of ₹1 crore, as prescribed by the Securities Board of India - SEBI.

Types Of Funds In the AIF Category 1

Under the Category 1 AIF, there are six types of funds available for investment. Each has its benefits and area of investing made available.

Venture Capital Funds (Startups & Early-Stage Ventures)

With the highest AIF Cat 1 fund raiser, Venture capital funds are successful in attracting capital for startups and early-stage ventures. It is the stage where businesses get a chance to upgrade, break even, innovate, and scale their ideas.

VCF (Angel Funds)

Also known as Angel Fund, it is a sub-type of Venture Capital (within AIF Cat 1). It caters only to angel investors by issuing units of the fund and raising capital. These pooled funds are then invested in startup ventures where traditional VCF may not be interested.

These investors must have at least ₹2 crores of net tangible assets, senior experience of 10 years, early investment experience, or be a serial entrepreneur. If a person fulfills these conditions, the Angel Fund accepts an investment of not less than ₹25 lakhs for up to 3 years from an angel investor.

Small & Medium Enterprises (SME Funds)

The SME Funds primarily invests in the business of Small & Medium Enterprises. More often, it is a kind of support provided for expansion purposes. In 2024-2025, ₹747 crores were invested in SME funds, of which ₹290 crores belong to retail investors alone.

Special Situation Fund (SSF)

Catering to specific companies, SSF caters to those undergoing unique situations such as restructuring, financial stress, or turnarounds. This raised capital enables them to retrieve and transform businesses from this situation. At this stage, the Special Situation Fund will invest in stressed loans of these companies for a minimum lock-in period of six months.

Here, SEBI requires each scheme of Special Situation Fund (SSF) to have a minimum investment limit of at least ₹100 crores. However, for investors, the minimum corpus for SSF AIF Cat 1 is ₹10 crores, ₹5 crores for accredited investors, and ₹25 lakhs for the manager/employee/director of the SSF Fund.

Infrastructure Fund

The Infrastructure AIF funds put money into infrastructure projects like roads, ports, power, and transport. The sole objective of these funds is to scale the country's infrastructural development and reap its benefits.

Social Venture Funds (impact-driven investments)

This type of category AIF 1 is made for non-profit entities or ventures to address social problems. Even here, the minimum investment is ₹1 crore, following the SEBI guidelines.

Bonus Fact: In 2025, major investments were made in Venture capital (₹27,375 crores), followed by infrastructure projects with ₹7,530 crores.

Benefits of Category I AIFs: Why AIFs are Becoming Popular Among HNIs

With mutual funds popular already, Alternative Investment Funds offer several benefits to investors, especially HNIs.

Here's why AIFs are becoming popular among HNIs in 2025:

• Early Access to High-Growth Opportunities:

  Venture capital and SME funds allow investors to back startups and emerging businesses at an early stage, which is something retail investors usually can't access.

• Portfolio Diversification:

  AIFs act as a catalyst in providing access to a variety of asset classes. By investing in sectors like infrastructure, SMEs, and social ventures, investors get exposure to alternative assets that reduce dependence on stock markets.

• Government & SEBI Support:

  Since Category I AIFs focus on priority sectors (like startups, infra, SMEs), HNIs get to enjoy favorable regulatory treatment and policy backing.

• Pass-Through Taxation:

  Profits are taxed in the hands of investors, not the fund, avoiding double taxation and making the structure more efficient.

• Socially Impactful Returns:

  Social Venture Funds align wealth with social/environmental causes.

• Exclusive Access to Assets:

  With a ₹1 crore minimum investment, these AIFs are tailored for HNIs seeking exclusive opportunities.

Risks & Who Should Invest?

Like any investment, Category I AIFs come with their risks. While they offer early access and diversification, investors should be aware of the following limitations:

• High Minimum Investment: Entry ticket is ₹1 crore, suitable only for HNIs and institutions.
• Illiquidity: Unlike mutual funds, AIFs have lock-in periods and may take years to realize returns.
• Higher Risk Profile: Startups and SMEs carry risk; failures can impact returns.
• Long-Term Horizon: Investors must have patience to stay invested for 3–5 years.
• Limited Transparency: Privately pooled, fewer disclosures compared to mutual funds.

Taxation Of Category 1 AIFs

The following table follows the taxation structure for Category 1 AIFs:

Factors	Category I AIFs
Capital gains & interest	Taxed at the investor level and exempt at the fund level.
Business income	Taxed at the fund level — 30% for residents, up to 39% for non-residents. Later exempt for investors when filing returns.
NRIs	Taxed directly and must file an annual ITR.
Distribution tax	12.5% for Indian retail investors and standard rates for foreign investors.

Conclusion

Category I AIFs are more than just another investment option. They offer a way for HNIs to participate in India's growth story. By channeling wealth into startups, SMEs, infrastructure, and social ventures, they allow investors to support innovation and development while also creating long-term value for themselves.

For beginners, even if the ₹1 crore ticket size feels out of reach today, understanding AIFs, especially AIF Cat 1, gives a glimpse into how the wealthiest investors diversify and grow their capital.

But don't let Category 1 AIF alone satisfy your knowledge, when Cat II and Cat III AIFs await.

Plus, before taking any investment decision, do consider consulting a professional advisor or a trusted AIF provider to guide you further.

Disclaimer: The information provided in this article is for educational and informational purposes only. Any financial figures, calculations, or projections shared are solely intended to illustrate concepts and should not be construed as investment advice. All scenarios mentioned are hypothetical and are used only for explanatory purposes. The content is based on information obtained from credible and publicly available sources. We do not guarantee the completeness, accuracy, or reliability of the data presented. Any references to the performance of indices, stocks, or financial products are purely illustrative and do not represent actual or future results. Actual investor experience may vary. Investors are advised to carefully read the scheme/product offering information document before making any decisions. Readers are advised to consult with a certified financial advisor before making any investment decisions. Neither the author nor the publishing entity shall be held responsible for any loss or liability arising from the use of this information.