AIF Categories, Strategies, Valuation and Risk Management
Domain 3 - AIF categories, strategies, valuation and risk management
This domain tests the three-category architecture, which strategies sit where, the concentration and leverage guardrails that apply to each, and how AIFs must value illiquid positions and manage risk.
Category map
- Category I: funds investing in start-ups, early-stage ventures, social ventures, SMEs or infrastructure - subcategories are Venture Capital Fund, SME Fund, Social Venture Fund and Infrastructure Fund. Close-ended, no leverage.
- Category II: private equity and debt funds that fall in neither I nor III and do not borrow except for day-to-day operational needs. Close-ended.
- Category III: funds using complex or diverse strategies, including listed and unlisted derivatives, permitted leverage up to 2 times net asset value. May be open-ended.
Concentration: Category I and II schemes cannot invest more than 25% of corpus in a single investee company; Category III is capped at 10% in a single company.
Valuation
A written valuation policy approved by the manager and trustee, disclosed in the PPM and applied consistently: unlisted securities of Category I and II funds follow ICAI valuation guidance; Category III marks to market with frequent NAV. Independent valuation is expected where a conflict exists.
Risk management
Leverage monitoring and disclosure, concentration and sector limits, liquidity management for open-ended Category III schemes, counterparty and prime-broker risk, derivatives exposure measurement, stress testing, and operational and cyber controls.
Worked example
A Category III fund has NAV ₹400 crore and gross borrowings ₹900 crore - 2.25x, above the 2x ceiling - and holds 12% of corpus in one company, above 10%. Both are breaches to be corrected by deleveraging and trimming the position; investor consent cannot raise a regulatory ceiling.
Traps
Category I funds cannot borrow for leverage; the 2x test is on gross exposure; annual valuation is inadequate for a leveraged Category III fund; ICAI guidance is not optional for unlisted Category I/II positions.