Alternative Investment Funds (AIFs) Who Can Invest in India?

Alternative investment fund is basically pool of investment funds that are used to invest in venture capital, hedge funds, private equity, managed funds, etc. To make it easy, an AIF is basically investment that is different from conventional investments like stocks, debt securities, etc.Alternative investment funds cover investments that don’t happen via traditional modes such as listed stocks, securities, bonds, cash, and property, among others. Commodities, hedge funds , venture, financial derivatives, paintings, antique coins, and stamps are some examples of alternative investments.Note that most alternative investment funds seek to raise capital from high net worth individuals, though institutional investors too can invest in them.

Alternative investment funds in India are regulated by the Securities and Exchange Board of India (SEBI). They are established in various formats such as trusts, limited liability partnerships and company, among others, and are allowed to operate under three categories, namely:

Category I and Category II shall be close ended schemes with a minimum tenure of 3 years. On the other hand, category III can be either open or close-ended.

Investments in these funds is open to both Indian and foreign investors. Foreign investments in alternative investment funds were announced during Union Budget 2016. It must be noted that most alternative investment funds generally raise capital from high net worth individuals as per the defined guidelines of the scheme. Some other conditions for investing are:

• Each scheme of the alternative investment fund should have a corpus of at least Rs. 20 crores
• An alternative investment fund will not accept an investment value of less than Rs 1 crore
• The fund manager must contribute at least 2.5 % or at least Rs. 5 crores in initial capital investment
• No scheme will have more than 1000 investors
• The fund will not collect funds except for private placement

Before investing in any financial asset, it’s crucial to know about the pros and cons of investing and alternative investment funds are no different. As these funds don’t typically correlate to stock markets, they give you the much-required diversification. Also, they help you mitigate volatility.However, rate of return from alternative investment funds are not guaranteed, though they have the potential to deliver higher returns than traditional investments.At the same time, the fees associated with these funds are on the higher side. Also, as they have the potential to deliver higher returns, the risks associated with them are high.

Following are the advantages and disadvantages of investing in alternate investment funds. Pros:

• Equalises to conventional assets
• Inflation hedge
• Offers high rewards
• Builds diversified portfolio

Cons:

• Difficult to value
• Unregulated
• Carried high risk
• Illiquid

Before investing in an alternative investment fund, you must understand the fund structure, its objective and the associated risk. Proceed after you have understood the nitty-gritty of the fund or asset you wish to invest in. Consult a financial advisor, if required.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.