Inside This Article
Category II AIFs have been developed to offer the investor flexible investment options that are not tied to government-specific incentives or even restrictions. These funds include private equity, real estate, debt funds, and other areas and are suited for investors who require diversification of portfolios using moderate risks. Category II AIFs are very suitable for long-term wealth creation in as much as this will be offering the investor many avenues.
Key Characteristics
- It gives the Category II AIF the freedom to invest in a wide range of assets, such as unlisted companies, debt securities, and other private instruments.
- It does not receive any direct government incentives like Category I AIFs.
- These funds are structured to generate wealth over an extended period with a lock-in period ranging from 5 to 7 years.
Types of Category II AIFs
- Private Equity Funds:
Private Equity Funds involve investment in privately held businesses. Here, the intent is to generate value through strategic partnerships and active management. As reported by the Indian Private Equity and Venture Capital Association, private equity investments in India went up by 15% in 2023 to ₹2.05 lakh crore. Such funds are ideal for investors seeking greater risk for high returns. - Debt Funds:
Category II debt funds are highly invested in structured debt products, which include corporate bonds, debentures, and other high-yield debt securities. With the interest rate up and demand for high-yield bonds also increasing, such funds are gaining popularity among investors seeking regular income with moderate risk. - Real Estate Funds:
Real estate funds invest in property assets that are purely residential in nature, purely commercial, or mixed in nature. Due to the constant upsurge in demand for real estate and commercial properties, it attracts investments as the market scales increase.
Growth of Category II AIFs
According to SEBI data, Category II AIFs had the highest share of all categories at ₹4.50 lakh crore in committed capital by March 2024. Growth in this area shows an increase in interest in private equity and real estate investments. HNIs in India have been increasing with their demand for private investment avenues.
Who Should Invest?
Category II AIFs are suitable for those investors who want to invest in private equity, real estate, or high-yield debt securities. They cater to the needs of investors looking for capital appreciation along with earning income over a long term.
