Exploring the Benefits of Alternative Investment Funds (AIFs) for Building a Diversified Portfolio

Investing in a diversified portfolio is pivotal for every investor as this strategy enables them to optimize returns while spreading the risk across a variety of asset classes. Accordingly, diversification helps reduce their exposure to asset volatility, while boosting their chances of achieving long-term fiscal objectives.

Still, with such numerous investment options available, it can be grueling to know where to start from. One investment vehicle investors must consider, on their quest for diversification, is Alternative Investment Funds (AIFs).

What are AIFs?

AIFs are a type of investment fund that pools capital from multiple investors, to invest in a variety of assets including private equity, real estate, and barricade finances. They are regulated by the Securities and Exchange Board of India (SEBI), and operate under specific guidelines and regulations.

Benefits of AIFs

In addition to optimal diversification, AIFs offer investors a range of benefits, as depicted here –

• AIFs invest in a variety of sectors, thus offering investors robust exposure to different asset classes and enabling them to meet diverse objectives.
• AIFs unlock access to unique investment opportunities as these funds frequently invest in private equity and real estate, sectors which are usually untenable for retail investors.
• AIFs are managed by professional fund managers with the expertise and business acumen necessary for identifying and investing in potentially untapped sectors.
• AIFs may offer tax benefits to investors, depending on the type of fund and the investment strategy.

How Can AIFs Help You Produce A Diversified Portfolio?

With AIFs, savvy investors can access an easy and effective way to foster a diversified portfolio primed for optimized returns. By investing in a variety of sectors, AIFs can help investors minimize their portfolio risk and limit the impact of volatility on a particular asset class. Further, AIFs can add value to an investor’s portfolio by opening up untapped avenues such as private equity and real estate, thus boosting the potential returns on the portfolio.

Why Should Investors Consider Investing In AIFs?

AIFs offer investors unique value propositions that they can not find in other investment vehicles. These are compelling investment vehicles that can help investors create a diversified portfolio, accrue several benefits, and achieve their long-term fiscal goals. With their unique investment strategies and professional management, AIFs are an option that investors should consider when designing optimal portfolios.

Now that we have enumerated the benefits of AIFs, let’s take a close look at the different types of AIFs available to investors.

Category I AIFs: These AIFs primarily invest in startups, small and medium-sized enterprises (SMEs), and businesses with immense growth potential. This category encompasses venture capital funds, angel funds, infrastructure funds, and social venture funds and these funds aim to generate substantial returns by taking on higher risks, focusing on new businesses that require funding and exhibit promising growth prospects.

Category II AIFs: This category includes private equity funds, debt funds, and funds of funds. It is important to note that debt funds in this context differ from typical debt mutual funds and these invest in debt instruments of companies that are not yet listed but show exceptional potential and maintain strong corporate governance practices. On the other hand, private equity funds invest in unlisted firms with a lock-in period ranging from four to seven years.

Category III AIFs: These involve private investments in public equity funds (PIPE) and hedge funds. PIPE funds invest in equities of publicly traded companies at discounted prices, offering the potential for robust returns. Hedge funds, on the other hand, employ aggressive investment strategies to generate higher revenue.

It’s important to note that AIFs are generally targeted at a specific group of investors, so it is important to understand the investment strategy and objectives of a fund before investing in it. Also, AIFs generally have certain investment prerequisites and these need to be analyzed in detail.

When considering investing in AIFs, it is important to complete your due diligence by exploring the fund’s track record, investment strategy, and performance. It is also important to understand the pitfalls associated with the fund. Before investing, you must ascertain how it fits into your overall investment strategy.

AIFs can be a great portfolio addition for investors who are willing to take on higher risks in the quest for better returns. With the right research and due diligence, AIFs can help investors achieve their long-term fiscal objectives and ensure optimal wealth accumulation