Risk and reward: Exploring CAT III alternative investment funds for investors

CAT III AIFs mainly invest in publicly traded stocks, allocate a maximum of 10% to a company, and are open to all investors.

 Invest in CAT III Alternative Investment Fund

As per the Securities and Exchange Board of India (SEBI) AIF Regulations 2012, Category III Alternative Investment Fund (CAT III AIFs) is a fund that involves complex trading strategies. It achieves this through leverage by investing in listed and unlisted equities.

Let's learn more about CAT III AIFs


  • Some AIFs may invest in unlisted equities, but investing in publicly listed stocks is preferred. 

  • Investments in CAT III AIF can allocate a maximum of 10% of their investable funds to public equities of a single company.

  • Anyone can invest in CAT III AIFs irrespective of their nationality.

Where does a CAT III AIF invest?

CAT III AIFs are like mutual funds, mostly investing in publicly traded stocks. Some may include unlisted stocks, but they mainly focus on listed ones. As per the SEBI regulation, only 10% can be invested in public equities of any one company. Furthermore, most funds charge a performance and management fee or any one of them based on investors' capital.

Also Read: Best equity mutual funds to include in your portfolio 2023

Who can invest in a CAT III Alternative Investment Fund, and how? 

According to the SEBI regulation, the minimum investment in AIFs is Rs. 1 crore. Any person, whether an Indian, NRI, or foreign national, can invest in AIFs. In addition, retail investors, corporations, institutions, and high-net-worth individuals (HNIs) can all invest in AIFs. 

To invest in this category of funds, know the details about the funds, such as their past returns, investment strategy, risk factors, etc. 

What is the taxation structure of a CAT III AIF?

Investments in this category are subject to taxation at the fund level due to the absence of pass-through status. Due to this, there is no need to pay taxes on redemption proceeds, rendering it tax-free for investors.

Ways to track fund performance

There are several ways to track fund performance. Investors can go through NAV and weekly, quarterly, or monthly reports published by fund managers to check the fund's performance.

Also Read: This is how you can assess your portfolio

What are the risk factors associated with CAT III AIFs? 

CAT III AIFs invest in public equities that have low liquidity risks. These risks are similar to other market instruments. The fund's performance depends on fund holding. As the value of such holdings rises, it will give high returns and vice versa. 

The takeaway

CAT III AIFs offer unconventional opportunities for short-term returns, mainly in publicly traded stocks. Eligible for investors of all nationalities, these funds come with tax advantages but also carry market risks. Thorough research is essential for smart investing.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Consult a financial advisor for investment decisions.

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