What is the difference between Category 1, 2, and 3 AIFs?

Difference between Category 1, 2, and 3 AIFs refers to Alternative Investment Funds classification under SEBI India based on investment strategy, leverage, and incentives. Category 1 AIFs invest in start-ups, early stage, social ventures, SMEs, infrastructure, considered socially or economically desirable by government, includes venture capital funds, angel funds, SME funds, social venture funds, infrastructure funds, they get tax benefits and government incentives and cannot use leverage. Category 2 AIFs are funds that do not fall in Cat1 or Cat3 and do not use leverage beyond permitted for temporary needs, includes private equity funds, debt funds, fund of funds, real estate funds, investing in unlisted companies at growth stage, most common AIF type, no special incentives but also no restrictions on complex trading. Category 3 AIFs are funds that use complex trading strategies and may use leverage, including hedge funds and PIPE funds, aiming for short-term returns through public markets, using derivatives and arbitrage, highest risk and no government incentives, faces stricter regulations on leverage. Tax treatment also differs, Cat1 and Cat2 often have pass-through status, Cat3 taxed at fund level. Risk level increases from Cat1 moderate early stage risk but socially beneficial, Cat2 moderate to high private equity risk, Cat3 high risk due to leverage. Minimum investment for all is 1 crore rupees. So difference lies in investment focus, leverage use, incentives, and risk profile.