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Category III AIFs cannot invest in passive funds like ETFs.
In a clarification issued to ASK Wealth Advisors, SEBI said that ETFs are like mutual fund units and Cat III AIFs are not allowed to invest their corpus in MF units.
The market regulator said that as ETF schemes are mandatorily listed and traded on exchange platforms, they cannot be covered in the permissible investments by a Category III AIF.
Category III AIFs invest in securities of listed as well as unlisted companies. There are two types of Category III AIF funds - long-only funds and long-short funds.
In long-only funds, AIF fund managers run thematic long-only ideas like an equity mutual fund but with lighter restrictions. On the other hand, long short funds use strategies far more complex than a typical mutual fund. These funds use strategies such as long-short derivatives and leverage to give higher returns.
SEBI also advised the funds to invest their uninvested portion of the investable funds and divestment proceeds in liquid mutual funds.