ALTERNATIVE INVESTMENT FUND (AIF)

ABOUT

Alternative Investment Funds are an avenue to pool in funds for investing in private equity, real estate or hedge funds

There are 3 categories of AIF’s :

• Category I :- AIF are those funds that invest in start-ups or social venture funds, infrastructure funds, SME funds, and so on. The government or regulators consider this category of funds as socially viable or economically desirable.

• Category II :-  Funds are those that do not leverage or borrow, other than to meet the day-to-day operational requirements. This category typically consists of Private Equity Funds and Debt funds.

• Category III :- funds typically comprised of Hedge Funds that employ diverse or complex trading strategies. By investing in listed or unlisted derivatives, AIF managers try to employ leverage.

AIFs provide HNIs opportunities to generate superior returns through customised investments.

However, with lower regulatory control and interventions, AIFs carry more risks compared to MFs and other traditional investments.

“It must be noted that by nature AIFs carry more risk, have a lock-in period and require time for the strategy to play out. As a result, they are suitable only for those who are willing to wait for the innovative theme to play out and carry the risk for such time. Investors should invest in AIFs only if their risk profile aligns with this expectation,” 

Cautioning the HNIs on the higher risk factor, Rao said, “In terms of allocation to AIFs, the overall portfolio allocation to the underlying asset is important to keep in mind, however it would be prudent to not to go beyond 5 per cent in a non-traditional AIF in a single name.”

Currently, there are nearly 700 AIFs with over Rs 4 trillion in investments, an impressive 15x growth since 2015.

WHY TO INVEST?

AIFs funds are generally subject to higher volatility, liquidity and credit risks than investments in traditional securities, which may act as a deterrent for investors. Investors today, however, have access to various products that offer high liquidity and low volatility. Most importantly, well-managed funds with a keen focus on comprehensive credit analysis and monitoring can greatly reduce the credit risk involved. For example, venture debt has the potential to yield high double-digit returns.

WHO TO INVEST? 

Investments in these funds is open to both Indian and foreign investors. Foreign investments in alternative investment funds were announced during Union Budget 2016. It must be noted that most alternative investment funds generally raise capital from high net worth individuals as per the defined guidelines of the scheme. Some other conditions for investing are:

• Each scheme of the alternative investment fund should have a corpus of at least Rs. 20 crores

• An alternative investment fund will not accept an investment value of less than Rs 1 crore

• The fund manager must contribute at least 2.5 % or at least Rs. 5 crores in initial capital investment

• No scheme will have more than 1000 investors

• The fund will not collect funds except for private placement

Pros:

• Equalises to conventional assets

• Inflation hedge

• Offers high rewards

• Builds diversified portfolio

Cons:

• Difficult to value

• Unregulated

• Carried high risk

• Illiquid

HOW TO INVEST?

To start investing in AIF, an investor must fulfil the following criteria:

1. Must have a minimum corpus of Rs. 20 Cr. for any particular scheme or Rs. 10 Cr. in case of an Angel Fund.

2. The minimum investment for an individual is set at Rs. 1 Cr. or Rs. 25 lakhs for an employee, manager, or director of AIF.

3. Each scheme can have a maximum of 1000 investors. The number is limited to 49 when it is an Angel Fund.

4. While Category I & II AIF can only be close-ended, Category III can be both open and close-ended.

5. The fund manager or AIF sponsor must have continued vested interest of 2.5% of the initial corpus.

6. Every individual investor has to submit id proof, pan card, and proof of income.

Top AIF’s To Invest In India:-

1. Abakkus Asset Manager- Emerging Opportunities Fund

2. Roha Asset Managers-Emerging Companies Fund

3. Girik Advisors- Multicap Growth Equity Fund