Are you considering investing in alternative investment funds? Do you want to learn more about AIFs before investing in them? If yes, you are in the right place. Essentially, AIF is a privately pooled investment vehicle that collects investments from high-net-worth individuals based in India or abroad and invests it in compliance with SEBI regulations for AIFs. Sophisticated investors prefer to invest in this special fund category as it differs from conventional investment funds. In recent years, alternative investment funds have gained popularity among investors in India. For starters, AIFs operate in segments such as real estate funds, infrastructure funds, venture capital funds, and hedge funds.
AIFs are regulated by SEBI and can be formed as trusts, companies, or limited liability partnerships (LLPs). In this blog post, we will discuss alternative investment funds in detail: What is, AIF, types of AIFs, and more.
Types of AIFs in India
AIFs, or Alternative Investment Funds are privately pooled investment funds that work differently compared to traditional funds. Also, alternative investment funds can be categorized into eight different types. Below we will discuss the types of AIFs in detail.
Venture Capital Funds (VCF)
The first and most important type of AIF is the Venture Capital Fund. These types of s are mostly sought after by new-age entrepreneurs who require substantial financing during the initial years. This is because venture capital funds can cater to their large financial requirements. VCFs mostly invest in start-ups with high growth prospects. So, HNIs investing in VCFs get a high-risk, high-return proposition when allocating their funds to these.
Angel Funds
Angel funds are also a popular type of alternative investment fund. These s invest in budding start-ups. An angel fund is an that raises funds from angel investors and invests them as per regulations. The minimum investment threshold of these s is Rs. 25 lakh per angel investor.
Infrastructure Funds
Infrastructure funds are also one of the popular types that primarily invest in infrastructure companies. This means these companies mostly invest in companies associated with road and building construction, port construction, and building railway networks. Investors with a bullish outlook on the construction industry invest in infrastructure funds.
Social Venture Funds
Social venture funds are also a popular type of AIF. As the name suggests, social venture funds invest in socially responsible businesses. Social Venture Funds have a philanthropic aim to invest in companies working for a social cause and earn decent returns for investors.
Private Equity Funds
Private Equity Funds, a type of AIF, help investors invest in unlisted and private companies. Raising funds as an unlisted company can be challenging. Moreover, these private equity funds come with a lock-in period.
Debt Funds
Debt Fund AIFs in India can invest in debt securities within the framework set by the market regulator SEBI. Debt Fund AIFs can invest in a wide range of debt securities such as NCDs, commercial papers, debt securities, corporate bonds, and fixed-income investments. These s offer an alternative investment opportunity for investors who want exposure to debt securities.
Fund of Funds
Fund of Funds is another popular type of AIF in India. These funds invest in other alternative investment funds (AIFs). So, they may not have an investment portfolio but focus on different alternative investment funds.
Private Investment in Public Equity Fund (PIPE)
Private Investment in Public Equity Fund (PIPE) is a type of alternative investment fund that invests in shares of publicly traded companies. PIPE helps investors in accruing company shares at a discounted rate. Investing in PIPE or private investment in public funds is relatively more convenient and easy than opting for a secondary issue.
Hedge Funds
Hedge funds also belong to the category of AIFs. These types of AIFs pool funds from only accredited organizations and investors. The hedge funds invest in both international and domestic debt and equity markets. Usually, these s follow an aggressive investment approach to generate higher returns for the investors.
Who can invest in an AIF?
AIFs are good options for investors who want to diversify their portfolios. However, meeting some eligibility criteria is a prerequisite to invest in these funds in India. Here are who can invest in an AIF:
- Indian citizens, foreign investors, and NRIs can invest in these funds.
- Investors should be able to adhere to a lock-in period of at least three years.
- The minimum investment limit for fund managers, employees, and directors is Rs. 25 lakhs. The minimum investment for investors is Rs. 1 crore.
- AIFs limit the number of investors in a scheme. These funds usually allow 1,000 investors per scheme. But Angel AIFs allow only 49 investors per scheme.
Benefits of investing in AIFs
AIF investment in India offers several benefits. Here are some of the advantages of investing in AIFs:
High Return Potential
AIFs allow investors to invest in high-risk strategies or assets that offer potential higher yields on investments. These assets can include private equity, start-ups, and hedge funds. With these funds, investors can earn from various sources such as dividends, capital appreciation, fees, interest, and more.
Low Volatility
Volatility-resisting investors can also benefit by investing in AIFs in India. Alternative Investment Funds offer consistency and stability even as they allow investors to invest in assets with low correlation to current market movements. These s can include funds of funds, debt funds, and real estate funds. These funds also allow investors to employ techniques like short-selling, leverages, and derivatives to hedge risks.
Diversification
Portfolio diversification is the most important benefit of the AIFs in India. With AIFs, investors can invest in several assets or strategies with varying returns, risk profiles, and characteristics. These strategies can include social venture, venture capital, and PIPE. It also reduces the impact of regional or local factors by allowing traders to invest across different markets, currencies, and geographies.
Alternative Investment Fund Taxation
If you want to invest in AIFs or Alternative Investment Funds, you must learn about the taxation process and regulations. We have discussed what is AIFs, its types, and benefits, and now we are going to explore the taxation aspect. AIFs are different from conventional investment vehicles that go beyond the capabilities of traditional investment products such as stocks and fixed deposits. We will see how taxation works:
Category I &II s (Real Estate funds, Private Equity funds)
- Have a pass-through status
- Investing income exempt from tax
- Business income is exempt from tax in the hands of the fund
- Short-term capital gains are taxed at 15% and long-term capital gains at 10%.
Category III s (Hedge funds, PIPE funds)
- Taxed at the maximum margin rate of 42.7%
- They may include advanced trading strategies.
Conclusion
AIFs, or Alternative Investment Funds, are unique investments that are beyond the realm of traditional investments. Clearly, the product is not for everyone. It is an interesting and unique investment option for investors, especially high-net-worth individuals who seek higher returns with minimal risk. s come in all shapes and sizes and cater to varying investor preferences. Investors would do well to conduct market research, observe the historical performance of the fund, and invest in AIFs.
