AIF as a compelling investment vehicle

While risk is inevitable in investments, you can minimize the same with a calibrated amount of diversification in your investment portfolio, owing to the correlation between asset classes. One of the most common examples of these would be the stock market and gold. You must have noticed that when the stock market goes down, gold prices go up and this inverse relationship helps investors hedge the risk of investments. While this is just one of many examples, with alternative investment funds (AIF), you can get multiple options to diversify your risk and generate higher returns as well. So, what are these AIFs and how can they help you diversify your investment?

What are alternative Investment Funds (AIF)?

Alternative Investment funds (AIF) are privately pooled investment instruments which collect capital from HNIs and institutional investors, in line with SEBI’s Alternative Investment Funds Regulations, 2012, and invest in varied asset classes. These funds are incorporated as companies, trusts or Limited Liability Partnerships.

SEBI has categorized these funds under three heads which are –

• Category I: AIFs which belong to category I invest in startups, SMEs and those businesses which are new and have a high growth potential. This category includes venture capital funds, angel funds, infrastructure funds and social venture funds. In this category the funds are focused on generating higher returns by taking on high risk.
• Category II: This category includes private equity funds, debt funds, and funds of funds. These debt funds invest in the debt instruments of companies which are yet to be listed but have exceptional potential and great corporate governance. Similarly, private equity funds also invest in unlisted firms but there is a lock-in period which ranges from four years to seven years.
• Category III: This category includes private investments in public equity funds or PIPE, and Hedge funds. The PIPE invests in the publicly traded companies’ equities at a discounted price while hedge funds are focused on generating higher revenue through aggressive investment strategies.

For whom are AIFs a suitable investment?

The minimum investment required for AIFs, at present, is INR 1 crore, while the minimum threshold for AIF fund managers, employees and directors is INR 25 lakhs. Any resident Indian, NRI or even foreign national can invest in AIFs in India adhering to the regulation drawn by SEBI.

These funds generally come with a minimum lock-in period of 3 years which means, once you invest any amount in AIFs, you cannot redeem the same for the next three years. Further, every scheme has a maximum limit of 1000 investors, excluding angel funds. In angel funds, the maximum investor limit per scheme stands at 49.

Why should you consider investing in AIFs?

If you are thinking about why you should consider AIFs then here are some reasons –

• Diversification: The primary reason for investing in AIFs has to be the excellent diversification that these funds offer. AIFs include multiple high-end investment funds like angel funds, venture capital funds, private equity and others. These funds invest in different businesses and thus minimize the overall portfolio risk.
• Less volatility: Another factor to consider is the volatility of these funds, which is usually on the lower side. As these funds are not directly linked to the listed stocks on the stock market, there are not many investors trading them or investing in them, and thus the volatility is less. This makes it suitable for HNIs keen on less volatile investment options.
• High returns: AIFs invest in businesses at their nascent stage and this unlocks huge growth potential and return prospects.

Wrapping up

For HNIs and institutional investors keen on low risk and well-diversified investment options capable of offering robust returns, AIFs can be an excellent opportunity.

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