UPSC Prelims 2025, Question 1

The answer: Only two

SEBI (Alternative Investment Funds) Regulations, 2012 define an AIF as a privately pooled investment vehicle, explicitly excluding entities covered under the Mutual Funds and Collective Investment Schemes regulations. AIFs are classified into three categories: Category I covers Venture Capital funds, SME funds, social venture funds and infrastructure funds; Category II covers private equity and debt funds; Category III covers Hedge Funds and funds using complex or diverse trading strategies. Venture Capital and Hedge Funds are therefore statutorily recognised AIF categories. Bonds and Stocks, by contrast, are ordinary tradable securities and asset classes that any investor, including an AIF itself, may hold in a portfolio; they are instruments, not pooled fund vehicles, so they cannot be AIFs. This leaves exactly two of the four items, Hedge Funds and Venture Capital, qualifying as Alternative Investment Funds.

The option-by-option autopsy for this question — why each of the other three is wrong, and which neighbouring concept each one was built from — is in the app.