NISM Series XIX-A · Unit 2 of 13 · about 5% of the paper
Alternative investment funds in India: NISM Series XIX-A notes and practice questions
The Indian AIF market, its categories and the investors it serves.
What to know in Unit 2
- Category I, II and III.
- Eligible investors and limits.
Key terms, examples and exam traps
Alternative Investment Fund
An AIF is a privately pooled investment vehicle that raises money from investors for investing as per a defined policy, regulated by SEBI.
Example. A trust pools ₹100 crore from wealthy investors for private investments.
Exam trap. This statement is false: An AIF raises money from the general public.
Category I AIF
Category I AIFs invest in start-ups, early-stage ventures, SMEs, social ventures and infrastructure that the government considers socially or economically desirable.
Example. A venture capital fund backing start-ups.
Exam trap. This statement is false: Category I AIFs use high leverage.
Category II AIF
Category II AIFs, such as private equity and debt funds, do not undertake leverage except for day-to-day operational needs and are not given specific incentives.
Example. A private equity fund investing in unlisted companies.
Exam trap. This statement is false: Category II AIFs are hedge funds trading with leverage.
Category III AIF
Category III AIFs, such as hedge funds, employ diverse or complex trading strategies and may use leverage and trade listed derivatives.
Example. A long-short equity fund using derivatives.
Exam trap. This statement is false: Category III AIFs cannot use leverage.
Angel fund
An angel fund is a sub-category of Category I that pools money from angel investors to invest in early-stage start-ups, with smaller minimums.
Example. An angel network invests in seed-stage ventures.
Exam trap. This statement is false: An angel fund invests in listed blue-chips.
Minimum investment
Each investor in an AIF must invest at least ₹1 crore, with a lower limit of ₹25 lakh for angel funds and employees or directors of the AIF's manager.
Example. An investor needs to commit at least ₹1 crore.
Exam trap. This statement is false: The minimum investment is ₹10,000.
Minimum corpus
An AIF scheme must have a corpus of at least ₹20 crore (₹5 crore for an angel fund) before it begins investing.
Example. A fund must raise ₹20 crore to begin.
Exam trap. This statement is false: An AIF can start with any amount.
Number of investors
An AIF scheme cannot have more than 1,000 investors (200 for angel funds) as it raises money through private placement.
Example. A scheme caps its investor count at 1,000.
Exam trap. This statement is false: An AIF can have unlimited investors.
Accredited investor
An accredited investor is one who meets income or net worth criteria and is recognised for certain relaxations in the AIF framework.
Example. A highly wealthy investor is certified with an accreditation agency.
Exam trap. This statement is false: An accredited investor is a retail depositor.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which statement best describes “Minimum corpus”?
- Category I and II AIFs may not invest more than 25% of investable funds in one investee company.
- AIFs cannot raise money through a public offer; they raise capital only by private placement.
- An AIF scheme must have a corpus of at least ₹20 crore (₹5 crore for an angel fund) before it begins investing.
- A feeder fund collects money from investors and invests it in a master fund, often used for foreign investors or to pool distributions.
Q2. The minimum investment by an investor in an AIF is generally
- ₹1 crore
- ₹50 lakh
- ₹10 crore
- ₹10 lakh
Q3. Which term is described here? Category II AIFs, such as private equity and debt funds, do not undertake leverage except for day-to-day operational needs and are not given specific incentives.
- Disclosure and investor reporting
- Screening
- Conflicts of interest
- Category II AIF
Q4. What is the minimum investment an investor must make in an AIF?
- ₹25 lakh
- ₹1 crore
- ₹10 lakh
- ₹5 crore
Q5. Which category does a private equity fund belong to?
- Category II
- Category I
- It has no category
- Category III
Q6. Which category may employ leverage and complex strategies such as hedge fund strategies?
- Category III
- None of them
- Category II
- Category I
Frequently asked questions
How much of NISM Series XIX-A comes from Unit 2?
Unit 2 (Alternative investment funds in India) usually carries about 5% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series XIX-A Unit 2?
Category I, II and III. Eligible investors and limits.
Are these NISM Series XIX-A practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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