Understanding nuances of AIFs

The understanding and comfort with investments have seen continuous evolution in the last decade. While it meant gold, real estate, and holding on to cash a few decades ago, people gradually started warming up to the idea of fixed income, with fixed deposits being a favourite. Over the last few years, equities have captured investor imagination in a big way.

While these asset classes remain in favour with retail investors, another investment option has also emerged for those looking to invest substantially higher amounts and have a higher risk appetite compared to retail investors.
 

An Alternative Investment Fund (AIF) is one such instrument.
 

What are AIFs?

An AIF is an investment vehicle that privately pools funds from either local or international investors to invest as per a defined policy. These funds fall into three different categories - I, II, and III.

Categories of AIFs

• Category I: Includes venture capital funds, angel funds, social venture funds, infrastructure funds, and SME funds.
• Category II: These include real estate and private equity funds. AIFs in Category II are not permitted to leverage other than for meeting their day-to-day requirements.
• Category III: These funds are permitted to use trading strategies and can also use leverage as a tool. Hedge funds fall into Category III AIFs.
   

Key Things You Should Know About an AIF

Ticket Size

• The minimum ticket size for investors is Rs 1 crore.
• For investors who are employees or directors of the AIF, the minimum investment size is Rs 25 lakh.
   

Tenure

• AIFs falling into categories I and II need to be close-ended and have a minimum tenure of three years.
• Category III AIF can either be close-ended or open-ended.
   

Corpus

• Each scheme of an AIF needs to have a corpus of Rs 20 crore.
• For angel funds, this limit is set lower at Rs 10 crore.
   

Number of Investors

• An angel fund cannot have more than 49 investors.
• An AIF scheme cannot have more than 1,000 investors.
• Investments in AIFs can be done on a joint basis as well. An investor can jointly invest with their spouse, children, or parents.
   

Regulation

• AIFs are regulated by the Securities and Exchange Board of India (SEBI).
• Investors can file complaints against AIFs through SCORES (SEBI Complaint Redress System), a centralized grievance system set up by the market regulator.
   

Benefits of Investing in an AIF

Diversification

• To protect one’s portfolio from an adverse reaction in a single asset class, most money managers advise diversifying the portfolio using a mix of different asset classes. The proportion of each asset class is determined by a mix of several factors, including risk appetite, liquidity, and understanding of that asset class.
• For those having the available funds, adding AIFs can help diversify their portfolios.
   

Higher Returns

• Investment in AIFs entails a higher risk compared to some traditional instruments. However, they can also lead to higher returns, which can be considered by those who have the appetite for it.

Low Volatility

• These investments do not have a significant correlation with equity markets, making them less volatile in nature. This makes them suitable for investors given the higher benefits of compounding.

Who Should Consider Investing in an AIF?

• AIFs are relatively complex instruments compared to some traditional investment avenues and hence require a higher degree of understanding. Investors who have the time and resources to understand the nuances of these investments should consider them as an investment option.
• The ticket size needed for an AIF is much higher compared to traditional investments and involves taking higher risks. Both factors should be kept in mind while making an investment decision.

What are the Various Kinds of AIF?

Here are some of the most popular AIFs that investors can consider:

Conclusion

The evolution of investments has brought AIFs to the forefront, providing high-net-worth individuals with new avenues for diversification and potential high returns. While traditional investments like gold, real estate, and equities remain popular, AIFs offer a complex but rewarding alternative for those with the means and understanding to navigate them. As the market continues to develop, AIFs are becoming an essential component of a diversified portfolio, allowing investors to tap into the growth of start-ups, private equity, and other non-traditional assets.