Types of Alternative Investment Funds in India

With the stock market making new highs and the India growth story deepening its foothold, the number of wealthy individuals and family offices in the country has also been growing fast.

These individuals are rapidly seeking alternative options to traditional exchange equities, mutual funds, bonds, real estate and gold to what we call Alternative Investment Funds or AIFs. From about 90 Alternative Investment Funds registered with the SEBI in 2015, today there are over 360 AIFs with total assets under management of over Rs 40,000 crores!

Greater flexibility in making investments, with easier capital and compliance requirements as compared to mutual funds or portfolio management services structures, have driven growth in this space.

AIFs are privately pooled investment vehicles that collect money from sophisticated individuals and invest as per their own policies, in both listed and unlisted companies.

There are 3 main categories of AIFs:

Category – I

Alternative Investment Funds, are those which are considered to have a positive effect on the economy and typically invest in infrastructure, social sector companies, start-ups or small and medium enterprises. These sectors, being economically and socially relevant for growth, result in these funds being provided with incentives and concessions by the government. Thus, they will typically include Venture Capital funds, SME funds, Infrastructure Funds, Social Sector Funds etc.

Category – II

Alternative Investment Funds are those which only undertake leveraging or borrowings to meet operational requirements as permitted under regulations by the SEBI. There are no incentives or concessions provided to these funds. Typically, these include certain debt funds, private equity funds etc.

Category – III

Alternative Investment Funds are those which undertake very diverse and complex trading strategies and can make investments in both listed and unlisted instruments. They also do not enjoy any benefits or incentives. These are typically hedge funds, or quant funds with objectives to generate short-term returns etc. Also, unlike the first two Categories of Alternative Investment Funds, these funds can be open-ended in nature.

Alternative Investment Funds thus allow more flexibility in terms of the choice of investments for the fund manager. A typical AIF has a smaller fund size compared to the traditional mutual fund which allows the investment portfolio to have few, high conviction bets.

Fewer number of private investors also means that the strategy and mandate can be made more focused, using technical and fundamental analysis, and allow the fund manager to make market predictions with a slightly wider risk spectrum.

Alternative Investment Funds, therefore, offer a niche and specialized investment vehicle for high net-worth individuals who seek to diversify from existing equity and equity-oriented mutual funds or PMS services offered to them.

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