NISM Series XIX-B · Chapter 4
Category III AIF: Fund Structures and Service Providers
This original lesson is awaiting subject-matter review. If something looks wrong, tell us through the contact page.
This chapter (about 12 marks) explains how Category III AIFs are structured, whether they raise money onshore or offshore, and the service providers that support them. Expect questions that ask you to match a structure to its purpose or a task to the right service provider.
1Legal forms
An AIF in India can be set up as a trust, a company, a limited liability partnership (LLP) or a body corporate. Most Category III AIFs are trusts:
- the settlor creates the trust with a small initial amount;
- the trustee holds the assets for the beneficiaries (the investors);
- the investment manager is appointed under an investment management agreement;
- investors receive units representing their beneficial interest.
Trusts are popular because they are flexible, familiar to investors and simple to run.
2Onshore and offshore funds
- An onshore fund is set up in India and takes money from Indian (and some foreign) investors.
- An offshore fund is set up outside India, often in a jurisdiction such as Mauritius, Singapore, Cayman Islands or Luxembourg, to pool foreign investors' money.
- Foreign money can reach Indian markets through an offshore fund registered as a foreign portfolio investor (FPI), or by investing in an Indian AIF (often through a feeder vehicle).
- GIFT City (IFSC) offers an Indian alternative for offshore-style funds, regulated by IFSCA.
3Common structures
- Unified (pooled) structure: domestic and foreign investors invest directly in the same Indian AIF.
- Co-investment: alongside the fund, selected investors invest directly in a particular opportunity. Co-investment must be on terms no better than the fund's, and must follow SEBI's rules on how it may be offered.
- Parallel structure: two funds with the same strategy (say, one onshore and one offshore) invest side by side in proportion to their size. Each serves a different investor group.
- Master-feeder structure: one or more feeder funds collect money from different investor groups and invest it all in one master fund, which holds the portfolio. Trading happens only at the master level.
Example A manager runs an Indian Category III fund. A Singapore feeder fund collects money from foreign investors and invests it into the Indian fund. The Indian fund is the master; the Singapore vehicle is a feeder.
Remember
- Parallel = two funds trading side by side.
- Master-feeder = feeders pool money into one master, which trades.
- Co-investment = selected investors invest directly in a deal alongside the fund.
4Service providers
| Service provider | Main role |
|---|---|
| Custodian | holds the fund's securities safely and settles trades. Mandatory for every AIF. |
| Fund accountant / administrator | keeps books, calculates NAV, prepares investor statements |
| Registrar and transfer agent | maintains the unitholder register, handles subscriptions and redemptions |
| Auditor | independently audits the accounts every year |
| Broker / prime broker | executes trades; a prime broker may also offer financing, securities lending and reporting |
| Valuer | independently values unlisted or illiquid holdings |
| Legal and tax advisers | set up the structure, draft documents, advise on tax |
| Trustee | oversees the manager and protects investors (trust structures) |
| Distributor | brings in investors and services them |
Exam trap The custodian keeps the assets safe. The fund accountant calculates NAV. The registrar keeps the investor register. Do not mix them up.
Remember
- Every AIF must appoint a custodian.
- Prime brokers combine execution, financing and stock lending.
5Why structure matters to distributors
A distributor should be able to explain:
- which entity the client is investing in (onshore fund, feeder, master);
- how the structure affects tax, costs and reporting;
- who the key service providers are, since independent custody, valuation and audit protect investors.
Original summary written by Integrato Digital to complement the official NISM workbook (March 2026 version). Read the workbook for the full text.