Category III AIFs represent the most active and tactical side of the alternative investment world. These funds are designed for investors who want to play both sides of the market, capturing upside and protecting downside through sophisticated strategies.
Category III AIFs include hedge funds, long short equity funds, and other strategies that use leverage, derivatives, and active trading to generate returns. They thrive on market movement, whether the indices are rising or falling. Unlike traditional mutual funds, these vehicles aren’t bound by daily benchmarks; they chase alpha, the extra edge beyond market returns.
One investor learned this firsthand when constant market swings began eating into her portfolio. Instead of staying fully exposed to volatility, she diversified into a Category III fund. Her fund manager used a mix of long short and arbitrage strategies to smooth out returns, allowing her portfolio to stay steady even when markets turned choppy, while others were caught in the turbulence.
As of June 2025, Category III AIFs have received commitments of over ₹2.4 lakh crore, according to SEBI, a sharp rise as more investors seek tactical, professionally managed exposure beyond standard equity and debt.
The tax structure differs here too. Unlike Category I and II, Category III AIFs are taxed at the fund level, making them less tax efficient, but their potential to generate higher, market neutral returns often outweighs that drawback for seasoned investors.
In short, Category III AIFs represent the bold side of India’s alternative investment universe, created for those who want their capital to perform even when markets don’t.
So, is it time for you to add high-growth, alternative strategies to your portfolio?