Alternative Investment Funds (AIF)

Enlightened investors usually go beyond the ordinary aim of high returns. Their methods for investments have a certain discipline. These investors value diversification, risk-management and superior returns by leveraging innovative ideas. These rich investors are also known as ultra-high net worth individuals. Large firms that are active in the investment advisory business aim to cater to the goals of such savvy investors. In the past three decades – post-liberalisation, investment advisory firms have ensured that some of their clients’ money moves from Portfolio Management Services (PMS) to Alternative Investment Funds (AIF).

There are three types of Alternative Investment Funds (AIF). The Category I AIF includes infrastructure funds, social venture funds, small and medium enterprise funds and venture capital funds. The Category II AIF comprises Private Equity Funds and debt funds. And the Category III AIF includes hedge funds and private investment in public equities (PIPE) funds. According to data published by the Securities Exchange Board of India (SEBI), assets under management across all alternative investment funds registered in India stood at Rs 1.89 trillion, as on June 30, 2020.

Category I AIF plays a key role in any economy and India is no exception. These funds invest in start-up companies, small-and-medium-sized companies and infrastructure projects. Many entities in these segments are starved for capital and AIF cater to those financing requirements.

Category II AIF caters to the financing of relatively established corporations. These funds can offer either equity or debt funding. These funds offer funding on sophisticated terms. Many private equity funds that fall under category II AIF invest in companies with established business models and are looking for high growth. Most of these funds exit when a company goes for Initial Public Offer (IPO). Category I and II Alternative Investment Funds are close-ended structures with a minimum three-year term.

AIF falling under category III are generally open-ended schemes. They primarily focus on short-term investment strategies. They may employ investment strategies aimed at absolute returns for their investors by investing into a mix of stocks and bonds. The aim is to offer high risk-adjusted returns to investors in the medium term.

All AIF invest according to stated investment policy and AIF trustees oversee the functioning of the alternative investment funds. A sponsor of AIF signs an agreement with investment managers to manage the money invested in AIF. Each scheme of AIF must have a minimum corpus of Rs. 20 crore. AIFs are governed by SEBI (Alternative Investment Funds) Regulation, 2012. The minimum investment in AIF stands at Rs. 1 crore for each investor barring a few exceptions specified by the regulator from time to time. Investments in AIF are sourced through private placements.

Since the minimum investment threshold limit is quite high, only savvy investors tap these investment vehicles. Other pooled options like mutual funds, unit linked insurance plans do not offer such investment strategies. A few key advantages of an AIF are reduced risks, consistent returns, and meaningful diversification through exposure to assets that an investor cannot tap otherwise or a combination of all these. But not all investors make it big. These investors must seek advice from experienced professionals before investing so that they can increase the possibilities of wealth creation.