Introduction

Sometimes, traditional investment options may not be sufficient for generating higher returns. If you wish to go beyond equity, mutual funds, fixed deposits, etc., Alternative Investment Funds (AIFs) can be a viable option. These funds allow you to step into the alternative world of investment. Let's delve into their meaning, types, benefits, and eligibility.

What is an AIF?

AIFs are specialised investment avenues. They pool funds from sophisticated investors and invest in alternative asset classes like venture capital, infrastructure, private equity, real estate, etc. AIF investors usually include institutions, high-net-worth individuals, and family offices.

The Securities and Exchange Board of India (SEBI) regulates AIFs. According to the (Alternative Investment Funds) Regulations, 2012, an AIF can be a company, a limited liability partnership, a corporate body or a trust.

Types of AIFs

Now that you know what AIFs are, let's explore their different types:

Category I AIFs

• Venture capital fund: Invests in promising early-stage ventures that require large amounts of capital.
• Infrastructure fund: Invests in companies involved in infrastructural works like construction of roads, airports, bridges, power plants, etc., to generate long-term and stable returns.
• Angel fund: Invests in startups that do not receive funds through venture capital funds. It has a lower investment requirement than VCFs.
• SME fund: Invests in small and medium enterprises with a history of growth and profitability.
• Social venture fund: Invests in socially or environmentally responsible companies like ones dealing in clean energy, sustainability, etc.

Category II AIFs

• Private equity fund: Invests in unlisted or private companies with strong growth potential and business models but face problems in raising capital.
• Debt fund: Invests in debt securities via debentures, bonds and other fixed-income instruments of unlisted companies with promising growth potential.
• Fund of funds: Invests in other AIFs either of the same category or different categories. It does not buy bonds or stocks directly but invests in portfolios of other funds.

Category III AIFs

• Private Investment in Public Equity Fund (PIPE): Invests in equities of listed companies. The fund managers purchase company shares at a discounted price.
• Hedge fund: Invests in international and domestic equity and debt markets. It adopts an aggressive and complex strategy irrespective of the market conditions to generate returns.

Benefits of AIFs

Here’s the list of advantages of investing in AIFs:

• Potential for higher returns: AIFs usually invest in high-risk and high-reward assets. This provides an opportunity to earn higher returns than traditional investment avenues.
• Low market stock volatility: AIFs usually invest in strategies or assets that are not related to stock market fluctuations, such as debt, infrastructure, fund of funds, etc. This reduces your exposure to market volatility and offers stable and consistent returns.
• Portfolio diversification: AIFs invest in various assets with different features, risk profiles and performance. They also invest in different currencies and markets, reducing the impact of regional factors.
• Hedge against inflation: Some AIFs invest in assets like real estate and commodities that usually perform well during inflation. Investing in such AIFs can protect your investment value against inflation.

Can you invest in AIFs?

According to the SEBI regulations, qualified institutional buyers, high-net-worth individuals, employees, or directors of AIF or family offices can invest in AIFs. Other criteria for AIF investing are as follows:

• You can invest in AIFs as a resident Indian, non-resident Indian or foreign national
• Every AIF scheme should have a minimum corpus of INR 20 crores. Angel funds, however, should have a minimum corpus of INR 10 crores
• The minimum investment for investors is INR 1 crore, while it is INR 25 lakh for employees, directors and fund managers

Wrapping up

Alternative investment funds provide an array of investment choices, including hedge funds, venture capital funds, infrastructure funds, and so on. You can benefit from low volatility, earn higher returns, and achieve portfolio diversification. However, you must come under the eligible categories of investors to invest in AIFs. Also, AIFs come with higher risks, costs, and less liquidity. Hence, thorough research and consultation are crucial before investing.

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