A diversified portfolio helps with minimizing risk along with maximizing returns as well as liquidity. Alternate Investment Funds (AIF), as the name suggests, are a type of investment vehicle acting as an alternative to traditional investments.
Alternate Investment Funds (AIFs) can be understood as a pool of investment by private investors mostly in alternate assets i.e., those that are not available in the traditional market like stocks, or mutual funds or shares or lending in unlisted space. The question here is why would anyone choose Alternate Investment Funds over the more traditional investment vehicles?
AIFs invest in a wide range of assets including hedge funds, real estate, venture capital, infrastructure projects, etc. While investing in AIFs is considerably riskier and requires a evolved understanding on Investments, the returns are typically more handsome compared to conventional investing options. Nothing ventured is nothing gained after all!
AIF investments have seen an increment in recent years with fund managers running AIFs having raised nearly Rs 7 lakh crore of capital in 2022 from less than Rs 4.5 lakh crore two years ago. There are predictions around AIFs growing a lot bigger than what they are currently so taking advantage of AIFs should be on the investor checklist.
Karma Capital Advisors Pvt Ltd come in here and provide their expert assistance for Category III Alternate Investment Funds and help you navigate them efficiently. To know more about this alternate investment model, keep reading on.
Understanding Alternative Investment Funds
Alternate Investment Funds require evolved understanding of Investment space and thus they are a viable option for High Networth Individuals (HNI). HNIs have a net worth of 5 crores of liquid assets and thus can avail this, which is not available to the general public. Typically, the minimum investment required is 1 crore but this number can go higher.
While a surface view of AIFs seems promising, there are specifics that one should know before embarking on their AIF journey. The Indian AIFs get most of their money from HNI or Ultra-HNI investors. These investors get to choose from a few types of the AIFs classified by the Securities & Exchange Board of India-
- Category I AIFs: These funds invest in start-ups, early-stage ventures, social ventures, SMEs, infrastructure, and other priority sectors. Category I AIFs have restrictions on the amount of leverage they can use.
Infra funds, angel funds, venture capital funds and social venture funds all come under this category.
- Category II AIFs: These funds invest in private equity, debt, or other alternative assets. Category II AIFs can use more leverage than Category I AIFs and are in unlisted space.
Debt funds, real estate, funds of funds and private equity funds come under this.
- Category III AIFs These funds trade with a view of making short-term returns. Category III AIFs invest in equity, debt in listed space. Category III AIFs can use significant leverage.
Hedge funds, long shorts, long only come under this.
Advantages and Disadvantages of Alternative Investment Funds
The pros and cons need to be considered before going ahead with any kind of investment and the same holds true for AIF investments.
- Higher Potential Returns
- Direct Ownership Benefits (Cat II)
- Professional Fund Management
- Ability to use leverage (Cat III)
- High Investment
- Long Lock-in Periods
- Complex features
- Longer Investment horizons
- Complex Investment strategies (Hedge Funds)
Overview of the Process Of Investing In AIFs
Having explored how Alternate Investment Funds work and the benefits and risks associated with them, the next pertinent question would be around how to get started with investing in these funds. These are some criteria that need be ticked off before starting investing in AIFs-
- The minimum investment for an individual is Rs. 1 Cr., while for employees, managers, or directors of AIF, it is Rs. 25 lakhs.
- The maximum number of investors in a scheme is 1000, except for an Angel Fund, where the limit is 49.
- Category I & II AIF can only be close-ended, while Category III can be both open and close-ended.
- The fund manager or AIF sponsor must have a continued vested interest of 2.5% of the initial corpus.
- Every individual investor needs to provide proof of ID, PAN card, and income.
The Securities and Exchange Board of India (SEBI) presently looks over the AIF investments and lays down some guidelines that need to be followed when getting involved with such investments. Some of these include disclosure & reporting requirements, valuation guidelines, investment restrictions, etc. To read the SEBI guidelines, follow this.
As it would be clear by now, investing in AIFs can be trickier than conventional investments and should involve professional engagement unless the investor has a deep knowledge of how the funds work. Karma Capital offers its capabilities in form of Cat III AIFs. You can know more by visiting https://karmacapital.co.in/investment-solutions/ While AIFs offer a potential for spectacular returns and are a great diversification option, specific guidelines need to be followed to avoid any uncomfortable legal and financial confrontations.