What are Alternative Investment Funds (AIFs)?
Alternative Investment Funds (AIFs) are a separate category of investments and differ from traditional mutual fund investments. AIFs are used by investors for purposes of diversification, have potentially higher returns with limited risks, or to access asset classes that are not regularly available through traditional investments. AIFs include a variety of assets and strategies, including private equity, hedge funds, real estate, venture capital, and more. AIFs are used to gain exposure to asset classes that are not readily available in conventional investment options.
Why should you consider AIFs?
1. Potential for Higher Returns: AIFs offer the potential for greater returns compared to traditional investments by providing exposure to alternative assets with unique growth opportunities.
2. Diversification Beyond Stocks and Bonds: AIFs enable investors to diversify their portfolios beyond conventional stocks and bonds, reducing overall portfolio risk.
3. Risk Reduction Through Asset Class Diversification: By spreading investments across different asset classes, AIFs help mitigate the impact of underperformance in any single investment on the overall portfolio.
4. Access to Unconventional Growth Sectors: AIFs allow investors to tap into growth opportunities in sectors that may not be easily accessible through traditional investments, such as private equity, hedge funds, real estate, and venture capital.
5. Expert Management and Risk Mitigation Strategies: Investors benefit from the expertise of professional fund managers specialized in alternative asset classes. Additionally, AIFs often employ strategies to minimize risks and complexities, although they may entail less liquidity, higher fees, and greater market volatility.
Types of AIF
Sebi has classified AIFs into 3 categories.
Category I AIF: This group of AIFs directs investments towards startups, early-stage ventures, social initiatives, small and medium-sized enterprises (SMEs), as well as sectors identified as socially or economically beneficial by government or regulatory bodies. It may further be classified into:
1. Venture Capital Funds (Including Angel Funds): These funds specifically target startups or early-stage ventures with significant growth potential.
2. SME Funds: These funds invest in small and medium-sized enterprises that demonstrate a solid track record of profitability and growth.
3. Social Venture Funds: These funds invest in companies aiming to have a positive impact on society or the environment, such as those involved in sustainability or clean energy, while also delivering favorable returns.
4. Infrastructure Funds: These funds invest in infrastructure projects like railways, bridges, and airports.
Category II AIF: These are funds which do not fall under category I or category III. They can not use leverage or borrow. Various types of funds under this category are
1. Private Equity Funds: These funds make equity investments in unlisted companies, assisting them in raising capital.
2. Debt Funds: These funds invest in the debt securities of unlisted companies through instruments like bonds, debentures, and other fixed-income options.
3. Fund of Funds: These funds invest in a range of other AIFs rather than directly purchasing stocks or bonds.
Category III AIF: These AIFs employ intricate trading strategies, potentially using leverage or debt for investments in listed or unlisted derivatives. Examples of funds in this category include:
1. Private Investment in Public Equity Fund (PIPE): These funds invest in listed companies' equity, often at a reduced price when the company seeks to raise capital due to a decline in share value.
2. Hedge Funds: These funds utilize diverse investment tactics like short selling, arbitrage, futures, derivatives, and margin trading to maximize investor returns.
Who should consider investing in AIF
If you're a small or new investor, it's best to begin your investment journey with mutual funds. However, if you have a substantial portfolio and investing experience, you should think about allocating some of investment in AIFs. You should consider products to exposure into new asset classes, like private equity, venture funds, infrastructure and residential real estate. These asset classes help you diversify your portfolio further.
The minimum investment required in AIF is Rs 1 Crore.
How to invest?
There are over 1300 SEBI registered AIFs, each with multiple strategies and plans, making the choice daunting and difficult. At Goalstox, we can help you select the right scheme for you to fit your goals, portfolio, and risk profile.