There are many kinds of investments – AIF funds or Alternative investment funds is one of them. Investors always look for opportunities to make sound investments and good profits. While many financial instruments are suitable investments, most investors invest in bonds, stocks, and the cash market as the most popular and easily accessible investment methods.
However, there are other investments that serve a different purpose for investors willing to take a bigger risk and invest a larger sum. Alternative Investment Funds are special investment vehicles that do not follow conventional investing methods. SEBI (Securities and Exchange Board of India) states that Alternative Investment Funds can be formed as a company, a corporate body, a Limited Liability Partnership or a Trust.
Alternative Investment Funds are privately pooled investments. These AIFs invest in ventures, hedge funds, private equity, etc. Alternative Investment Funds require a significant investment, which is why not all investors can invest in this fund directly. Generally, institutions or high-net-worth individuals invest in AIFs. These privately pooled investments collect investment amounts from their investors – Indians or foreigners – who are willing to invest a huge amount of money. These investments earn high returns while taking a considerably high risk. Alternative Investment Funds do not include mutual funds or funds covered under the SEBI (Collective Investment Schemes) Regulations 1999.
Investors who want to invest in AIFs need to meet the following requirements:
Alternative Investment Funds are categorised based on the forms of investment and their objectives. As its regulation, SEBI has divided AIFs into the following categories based on which AIFs are registered.
These are funds invested in small and medium enterprises (SMEs), startups or new businesses that show growth potential. The government also promotes and incentivises such investments as they help boost the economy and provide job opportunities.
Category I comprises the following types of funds:
These funds invest in startups with great business ideas but with limited resources. Such businesses find it difficult to raise funding through capital funds. This is when venture capital funds come into the picture.
VCFs accumulate investments from investors who want to make equity investments in promising startups. This amount is invested in many startups depending upon their business profile, size, expansion growth, etc. The VCF typically invests in businesses at their initial stage. In return, each of these investors gets a share of this business proportionate to their investment. VCFs are usually preferred by High Net-worth Investors (HNI) who look for high-return investment options.
These funds invest in infrastructure companies like railway and airport construction, communication assets, etc. Investment in infrastructure requires a significant contribution, and this sector has few competitors. Returns in IFs are by way of capital income and dividends.
This type of investment looks at companies that try to bring about a change in society. Such companies focus on solving environmental and social issues and making a profit. Social Venture Funds invest in projects that contribute to the growth of a developing country. Usually, such companies have the best expertise in the form of technological and managerial resources, making them a potentially good investment for investors, enterprises, and stakeholders.
It is a venture capital fund where fund managers pool money from ‘angel’ investors and invest in startups. These funds invest in companies that do not receive funding from the Venture Capital Fund. Along with funding, investors also contribute by sharing their expertise in business management. They help startups establish their businesses, contribute to their growth and make them profitable. The minimum investment by each investor for this fund is Rs. 25 lakh.
Category II comprises the following funds:
The Private Equity Fund invests in a group of unlisted private companies that find it challenging to raise funds by issuing equities or debt instruments. Such companies offer the investor a diversified portfolio of equities to lower the risk. These funds come with a lock-in period of 4 to 7 years.
This fund invests in the debt securities of listed and unlisted companies. Such companies have low credit scores and involve high risk. Typically, such companies have good growth potential and experienced management but face a financial crunch. According to SEBI guidelines, money cannot be given as loans as alternative funds are pooled investment vehicles, which is why the companies issue debt securities.
It is a combination of various alternative funds. The strategy here is to invest directly in a strategic group of AIF Funds rather than create their own portfolio through individual investments. Unlike mutual funds, AIFs cannot issue units of funds publicly.
Category III comprises funds that yield short-term returns.
PIPE invests in shares of publicly traded companies by acquiring them at discounted prices. This way, the company receives capital, and the investors get a stake in the company.
Hedge funds pool money from investors and institutions and have an aggressive approach to making profits for their investors. Investments are made in domestic and international markets. They are expensive, and the management can charge a fee of 2% to 20% of the profit.
Let’s explore the importance of investing through AIFs and the benefits that come with it.
Here are some of the benefits:
Investing in AIF can be an alternative to diversified portfolios. These investments are usually unaffected by the changes in the stock market. This lowers the risk of the portfolio.
Investments are not in physical forms, like owning a property. These public investments are paper assets, which may be in the form of contracts or documented deals. The investors get a stake in the company in which investments are made.
AIFs are unique financial vehicles that can be curated to fit the needs of big-ticket investors. Being governed by SEBI makes it a considerably safer form of investment as well.
In recent years, AIFs have picked up pace as a chosen form of investment in India. Those with the potential to make large investments and a considerably high-risk appetite can choose to invest in AIFs.
No, government concessions and incentives are only available for Category I investments.
No, the shares and securities of AIFs cannot be offered to the public. AIFs cannot be listed on the stock exchange.
Angel funds require a minimum of Rs. 25 lakh per investor. If AIF is not an angel fund, the minimum investment per investor is Rs. 1 crore.