Is Alternative Investment Fund (AIF) for you? Should you Invest?

2 Jun 2021  Read 1899 Views

Not all companies are listed. Then how do unlisted companies raise capital? And how do people invest in startups? One way is - Alternative Investment Funds.

Change alone is constant. The financial markets, which are popping up with new notifications now and then, will act as an absolute example. And the ‘alternatives investment fund’ is another add-on, which offers a roadmap plotted towards better returns.  So what is it?

Who does not want something new? The AIF’s or the Alternative Investments Funds gives the investors a new way of investing their hard-earned cash. Thus you can escape from the conventional method of investing money. Let’s understand in a much broader sense. 

What are Alternative Investment Funds?

Alternative Investment Funds (AIF's) are funds that help investors by deploying the privately collected pool of money into a variety of developmental avenues such as hedge funds, private equity, venture capital, debt funds, etc. An AIF is established by a company, LLP (limited liability partnership), corporate body, or Trust. These investments, however, are not covered under the purview of SEBI. But they are governed by Regulation 2 (1)(b) of the Regulation act of 2012. 

Apart from these, AIF’s also hold certain unique characteristics that differentiate them from the already known instruments:

  • The fees collected by the fund managers are pretty high when compared to other mutual funds and debt schemes. 

  • They are less liquid. Given that entry is restricted to a few who fulfill the criteria put forth, it is not easy to liquidate your holdings as well. 

  • These assets are hard to value and hence fail to offer a proper view of their worth. This is because the investments are made into rare asset classes and avenues. 

Types of Alternative Investment Funds

SEBI has categorized the AIF’s into three categories. They are as follows:

  • Category I 

    • Venture capital funds 

    • Infrastructure funds 

    • Angel funds 

    • SME funds 

    • Social venture capital funds 

  • Category II

    • Private equity funds 

    • Debt funds 

    • Fund of funds 

    • Real estate funds 

    • Fund for distressed assets 

  • Category III 

    • Hedge funds 

    • Private investment in public equity funds (PIPE) 

Category I AIF 

Here the funds are invested into those businesses which are new and hold high growth potential. They are viewed as economically and socially viable. Even the government promotes and incentivizes these as they lay the road for the country’s development as a whole. 

  • Venture Capitalists – Anyone following India’s startup stories would be accustomed to this term. These funds act as the oxygen to startups. They focus mainly on the initial stage investment of any high potential (tech) companies looking for funds to bring life to their ideas. These can be categorized as high-risk return funds.

  • Infrastructure fund – Here, investments are made into public assets such as roads, airports, etc. Capital gains, dividends, and tax benefits (only when the government aims to support the same) can be claimed as returns from the fund. 

  • Angel funds – Angel investors invest in a start-up in its earliest stage and guide the management of the same in the right path.

  • SME funds – These are investments into micro, small and medium enterprises. These funds are said to deliver returns even higher than 8%. 

  • Social Venture Capital funds – These are funds that invest in a business that strives to bring a positive change in society. The fund will be investing a minimum of 75% of the assets in such business. 

Category II AIF 

 Those funds which do not take leverage or borrowings other than to meet day-to-day operational expenses fall under this category. 

  • Private Equity funds – Private Equity Funds or PE Funds invests funds into unlisted private companies. The investment horizon ranges anywhere between 4 – 7 years. 

  • Debt funds – The fund invests in the high-risk debt securities of both listed and unlisted companies.

  • Fund of funds (FOF)Fund of Funds as the name suggests, the investment is made in other AIF vehicles. However, the units of the same cannot be issued publicly. 

  • Real estate funds - As the name suggests, these funds divert the pool of collected money into various real estate projects offering the investors diversity and scope for better returns. 

  • Fund for distressed assets - Ever wondered whether an investment in bankrupt companies is possible? Then the Fund for distressed assets is the one. It enables investment in struggling business units. Naturally, there is enormous risk involved. 

Category III AIF

These are funds that offer short-term investment vehicles for investors. The following funds fall under the same. 

  • Hedge funds – these are less regulated and involve aggressive fund management techniques to fetch a better return for their investors. 

  • Private Investment in Public Equity funds (PIPE) – As the procedures for issuing a PIPE is less than that of other conventional methods, most companies use this to raise funds. Here the investors get the shares of companies that are publicly traded at a discounted price.

Just so you know, as of June-2020, Category II is the largest of all with around 77% of total industry AUM, followed by Category III with 13% and Category I with 11%. Moreover, some AIFs also invest in wines & art forms.

Criterias to invest in an AIF

Having gained a better understanding of what an AIF is, you must be wondering as to what makes you an eligible investor. Don’t worry; we have got that covered as well. 

  • You may be an NRI or PIO or OCI; you are still eligible for investment in these types of funds. 

  • The minimum investment which an individual can undertake is fixed as Rs 1 crore

  • However, in the case of angel investors, the lower limit has been fixed at Rs 25 Lakhs

  • If you are an employee, fund manager, or director of AIF, then the minimum limit is again Rs 25 Lakhs

  • The number of investors per fund is also restricted. The count is generally 1000, and in the case of angel funds, it is 49.

  • These funds have a minimum lock-in period of 3 years.

  • The Category I and II funds are close-ended, while Category III can either be close or open-ended.

Should you opt for it?

AIF’s can come as a perfect option when you are looking to diversify into less ventured avenues. The performance is less inclined with that of the stock markets. Meaning, the correlation is low. Hence you can worry less about fluctuations. When the returns are high, so will be the risk. As an investor, you must be mindful of this inherent risk as well.

Having said that, one should also understand that the returns are higher than any other traditional investment instruments, thus helping investors build a perfect passive income. However, it’s quite natural that the investors of such funds are mandated to a tax payment of 10 to 15% depending on their holding period. Category III funds fall under a higher tax bracket of 42.7%.

Conclusion

For any relatively big pockets among you hoping to spot a different investment scheme, AIF’s can be a sound choice. However, ensure that you are ready to fulfill the minimum criteria before opting for the same.

Besides, these kinds of avenues may not be everyone’s game. Especially for small retail investors, this may not be the best option (even if you are eligible). Because you may essentially be investing in ventures that pool your money into companies that don’t have publicly announced results. It’s like betting on people (management of those companies). You must take these caveats into consideration before investing.

With a Crore in hand, would you invest in AIF’s? If yes, then which category? Let us know in the comments below.

About the Author: Varishika Dinesh | 136 Post(s)

Varishika is on the verge of successfully completing B.Com. Nothing excites her more than reading books and watching movies. Business, finance, economy? You have her attention.

Liked What You Just Read? Share this Post:

Finology Blog / Invest / Is Alternative Investment Fund (AIF) for you? Should you Invest?

Wanna Share your Views on this? Comment here: