Understanding Alternative Investment Funds (AIFs) In India

Going beyond the ordinary is a familiar phrase many of us resonate with. But, alternative investment funds can be the torchbearer of this mantra in the investment world. Alternative investment funds (AIFs) help investors to explore beyond traditional investment instruments. These AIFs are generally open for large ticket-sized investments from high-net-worth individuals (HNIs) and institutional investors.

The alternative investment fund industry has proliferated in the last six years. It experienced a 10-fold increase in the commitments raised, totalling INR 8.3 lakh cr (see table below). These trends suggest that AIFs can grow into a large industry. It can potentially replicate the size and growth of the mutual funds industry (INR 47.79 lakh crores in AUM) in the coming years¹.

In this blog, we will delve deeper into the concept of alternative investment funds (AIF), their categorisation as per SEBI, their benefits and factors to consider before investing in them.

What Are Alternative Investment Funds (AIF)

SEBI (Alternative Investment Funds) Regulations, 2012 defines an alternative investment fund as “any fund established or incorporated in India which is a privately pooled vehicle which collects funds from investors, whether Indian or foreign, for investing it under a defined investment policy for the benefit of its investors”². It can be formed as a company, trust or LLP.

Types Of Alternative Investment Funds

There are three categories of AIFs - I, II, and III, according to SEBI. 

Category I AIFs

1. Angel Funds pool capital from individual investors to make early-stage investments in startups, starting with a minimum of INR 25,00,000.
2. Venture Capital Funds are investment vehicles financing early-stage and high-growth companies. These funds invest in startups in exchange for equity ownership.
3. Infrastructure Funds focuses on investing in public infrastructure projects. For example, transportation systems, utilities, ports, etc. 
4. Social Venture Funds invest in businesses or projects focusing on creative, positive social impact.

Category II AIFs

It includes those instruments not falling under Category I and III, and funds are mainly invested in equity and debt securities. A few examples of funds in Category II: 

1. Real Estate Funds pool capital from many investors to invest in a diversified portfolio of real estate assets.
2. Fund Of Funds invests in other AIFs. They hold an investment portfolio of other AIFs. They do not directly invest in stocks, bonds, or other securities.
3. A Debt Fund invests in debt securities of listed or unlisted companies as per the fund's stated objectives. Investment in debt funds is limited to HNIs and offers limited diversification.
4. Private Equity Funds pool capital from investors to invest in privately held companies.

Category III AIFs

1. Hedge Funds are private investment funds that use complex and risky strategies. The aim is to generate returns in a short time. 
2. Private Investment In Public Equity Funds (PIPE) invests in publicly traded firms by acquiring shares at a discounted price through private placements.

Grip Invest’s Offering Similar Opportunities Like AIFs For Retail Investors

• AIFs require large capital, generally starting from INR 1 crore (25 Lakhs in the case of angel funds), and are not within reach of retail investors. 
• However, technological advancements are paving the way for new-age investment discovery platforms like Grip Invest to make such opportunities accessible to retail investors as well. 
• With products like startup equity, investors can invest in high-growth and early-stage companies accessible at a low-ticket size of INR 2 lakhs only.

With BondX, an alternative to debt funds, a retail investor can invest as low as INR 1.2 Lakhs. It is a first-of-its-kind alternative investment product that pools together investment-grade rated bonds from a curated set of issuers and provides access to investors at a fractionalised investment amount.

Benefits Of Alternative Investment Funds

1. Diversification

AIFs expose investors to a variety of asset classes. This can help them diversify their investment portfolio and lower the overall risk.

1. Non-market-linked Returns

AIFs have a low correlation to the stock markets and are immune to market volatility. As a result, these funds help to stabilise your portfolio. 

1. Higher Potential Returns

Alternative asset classes often deliver higher returns than traditional investments. For example, investments in venture capital can yield significant gains over the long term.

1. Access To Exclusive Opportunities

AIFs provide access to opportunities usually unavailable to individual investors. These may include early-stage startups, fractionalised real estate, or infrastructure projects.

Factors To Consider Before Investing In An AIF

1. Risk Tolerance

AIFs carry higher risks than traditional investments. Investors should assess their risk tolerance before investing. 

1. Due Diligence

Prioritise detailed research before investing. Examine the fund manager's (or alternative investment platforms’) track record, investment strategy, and performance history.

1. Liquidity And Lock-In Periods

AIFs often have longer lock-in periods (at least three years) and very low liquidity. Consider your investment horizon and liquidity needs before committing to these funds.

1. Regulatory Framework

Familiarise yourself with the regulatory environment surrounding alternative investment. Ensure compliance and understand the investor protection measures in place.

Conclusion

Alternative investment funds allow investors to explore new asset classes and earn higher returns than conventional ones. Traditionally, AIFs and non-conventional investment opportunities were the domain of HNIs and required high initial investment. However, this is changing with the advent of new-age investment discovery platforms like Grip Invest! Visit us to learn more about how we are making a lot of alternative investment opportunities accessible to low-ticket-size investors. 

Frequently Asked Questions  

1. Is there any lock-in period? 
   Category I and II AIFs have a tenure of 3 years. Category III AIF may or may not have any such restrictions. 
2. What are accredited investors?
   An accredited investor refers to an individual or entity that meets specific financial criteria, granting them access to high-ticket and high-risk investment opportunities with a relaxation of the minimum amount requirement of INR 1 crore. Click here to read more. 

References:

1. Association of Mutual Funds in India <https://www.amfiindia.com/indian-mutual>
2. Securities and Exchange Board of India (SEBI) <https://www.sebi.gov.in/legal/regulations/apr-2017/sebi-alternative-investment-funds-regulations-2012-last-amended-on-march-6-2017-_34694.html> 

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