Q.1 | IAS Prelims 2025 — GS-I (Set-A)

Topic: Economy → Financial Markets → Alternative Investment Funds
Source: UPSC Civil Services Preliminary Examination 2025

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🔹 Question

With reference to investments, consider the following:

I. Bonds
II. Hedge Funds
III. Stocks
IV. Venture Capital

How many of the above are treated as Alternative Investment Funds?

(a) Only one
(b) Only two
(c) Only three
(d) All the four

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✅ Correct Answer: (b) Only two

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🧠 Classroom Explanation:

• In recent years, investment avenues beyond traditional stocks and bonds have expanded rapidly, especially among Ultra High Net-Worth Individuals (UHNWIs) and institutional investors.
• Such investors increasingly deploy funds in non-public markets, i.e., securities not listed on stock exchanges, often involving complex structures and higher risk.
• These pooled investment vehicles are collectively known as Alternative Investment Funds (AIFs).
• In India, SEBI (Alternative Investment Funds) Regulations, 2012 provide the legal framework governing AIFs.
• As per SEBI, AIFs include funds such as venture capital funds, hedge funds, private equity funds, real estate funds, etc., but exclude mutual funds.
• Venture Capital qualifies as an AIF because it invests in start-ups and early-stage ventures, which are unlisted and high-risk in nature.
• Hedge Funds also qualify as AIFs as they employ complex trading strategies and may use leverage, including in derivatives.
• Stocks and Bonds, on the other hand, are traditional investment instruments, typically traded in public markets, and therefore do not fall under AIFs.

👉 Hence, only Hedge Funds (II) and Venture Capital (IV) are AIFs.

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🗂️ AIF Categories (SEBI Classification)

• Category I AIFs
  Funds investing in start-ups, SMEs, infrastructure, social ventures, or stressed assets
  Examples: Venture Capital Funds, SME Funds, Infrastructure Funds, Special Situation Funds
• Category II AIFs
  Funds not falling under Category I or III and not using leverage (except for operational needs)
  Example: Private Equity Funds
• Category III AIFs
  Funds employing diverse or complex trading strategies, often using leverage
  Example: Hedge Funds

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🔗 Bridge Points for Future Questions

• UPSC may test the difference between AIFs and Mutual Funds, especially regulatory oversight under SEBI.
• Questions may be framed on AIF Categories I, II, III with examples and investment objectives.
• Linkages can be drawn with financial stability, capital formation, and start-up ecosystem financing.
• Expect possible questions connecting AIFs with IFSC (GIFT City) regulations or foreign portfolio investments.
• Comparative questions may involve AIFs vs PMS (Portfolio Management Services).

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🧭 GS Mapping

GS-I / GS-III (Overlapping Area)
→ Economy
→ Financial Markets
→ Alternative Investment Funds (SEBI Regulations, 2012)

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🏁 Classroom Note

This question reflects UPSC’s growing emphasis on contemporary financial instruments, requiring candidates to integrate current affairs with core economic concepts, rather than relying on textbook definitions alone.

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