A primer on Alternative Investment Funds

Ever wonder what investment routes can crores of money take? High Networth Individuals (HNI) have been caught fancying the Alternative Investment Funds (AIF). After Mutual Funds and Portfolio Management System(PMS), AIF have grabbed the investor’s interest.

You must be thinking what is with this AIF? Well, AIF, as the name goes is an Alternative Investment Fund and is a fusion of a mutual fund and a PMS. Wondering how? AIF is a pool funds and from an investment point of view, it is almost like a PMS. The investment in AIF is denoted by units, just like in mutual funds. For clarity, some examples of AIFs are Venture Capitalist (VC), Angel Investors, Private Equity Funds, etc. AIFs invest in startups, small and medium enterprises (SMEs), private investments in public companies, etc. Primarily, the AIFs invest in unlisted securities or securities which are not liquid.

What’s the attraction point?
There are zero confining guidelines applicable to an AIF. An AIF can take high risks and wager concentratedly as it has that kind of flexibility.

What do the investors have in store for themselves?
In return for the investment, investors get units of the fund or the scheme and that represents shares or partnership interest. Closed-ended AIFs can list their units publicly, i.e, on the stock exchange. The AIF can launch schemes but with a simple guideline of registering with SEBI 30 days before its launch and for Angel Funds, it should be 10 days before its launch.

Why is it only catching the attention of HNIs?
Simply because the minimum amount of investment in an AIF is Rs. 1 crores and that makes it attainable only to those with a high net worth.

The below image states the various categories of AIFs and compares it for better understanding:

 

Just like Mutual Funds and PMS are regulated by a body called SEBI, the regulation governing the VCs and Angel investors as they also come under AIFs is SEBI (Alternative Investments Funds) Regulations, 2012. AIFs are included in the manner of a trust or LLP or company. Most preferable is in the form of a trust as it involves less hassle and more taxation benefits. The total sum of the funds invested by investors in the AIF is called the “Corpus’’ and there are some regulations pertaining to the schemes of the AIF. It is bound by a written contract or any such document as on a particular date.

What are the benefits of an AIF?

  • Some complex hedging strategies are best executed in an AIF as pooling of money is on such a scale that large investments can be made.
  • An AIF allows you to invest in unlisted business in the VC Funds or invest in Startups.

The above two points only iterate the fact that an AIF allows you access to wider investments which are far beyond the listed business stocks and mutual funds. If any of those strategies match your portfolio and/or your risk profile, Alternative Investment Funds are the way to go.

For any other queries on AIFs, click here.
                                                                                                                                                                                                                                                - By Saloni Parakh


Posted On: 23 Jul 2019 Home / Investing / A primer on Alternative Investment Funds