The phrase “alternative investment fund” describes a group of pooled investment funds that invest in managed futures, hedge funds, venture capital, private equity, and other sorts of investments. AIFs are a sort of investment that are different from conventional investment options like stocks, bonds, and other debt securities. An Alternative Investment Fund is defined by the Securities and Exchange Board of India Regulation Act, 2012. (SEBI). AIFs can be established as a corporation, trust, or limited liability company (LLP). Alternative Commitment Funds are typically used by high-net-worth individuals and organizations since, unlike Mutual Funds, they require a sizable initial contribution.
What Is an Alternative Investment Fund?
In India, one kind of investment fund is called an alternative investment fund (AIF). AIF is a tool that investors can utilize to invest and gain rewards. It is a fund of funds that makes investments in asset types besides cash, bonds, and stocks. For the advantage of investors, it pools investor funds and invests them in a variety of securities as defined by the Securities and Exchange Board of India (SEBI).
Privately pooled investment funds that invest in private equity, venture capital, hedge funds, managed funds, etc. make up an AIF. AIF stands for an investment that is distinct from traditional investments like equities, debt securities, etc. High rollers, including Indian citizens and foreign investors, can invest in it. AIF is typically invested in by institutions and high net worth people due to the high investment requirements. AIF is typically invested in by institutions and high net worth people due to the high investment requirements.
- An alternative investment funds are also a type of asset, but it does not come under the traditional investment categories, including shares and bonds, etc.
- Conventional categories include stocks, bonds, and cash.
- Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, lack of regulation, and degree of risk.
- Funds like hedge funds, venture capital, and private equity come under alternative investments.
Example of Alternative Investments
The mere fact that alternative funds are regulated does not guarantee safe investments. Many alternative mutual funds have short performance histories, according to the SEC. An alternative fund is also still vulnerable to the risks associated with its underlying assets, despite the fact that its diversified portfolio inherently reduces the possibility of loss. ETFs that focus on nontraditional assets have, in fact, had a mixed history.
Features of Alternative Investment Funds
- Private pooling – Fewer Regulations
- High risk – more time
- Indian / foreigner investors
What Are the Key Characteristics of Alternative Investments?
Here are a few of the most typical traits that set alternative investments apart from conventional investing:
Correlation: Compared to conventional assets like equities and fixed income, alternative investments typically have a low correlation. As a result, they are less vulnerable to or exposed to broad market fluctuations. When it comes to diversifying and building a portfolio, this is really advantageous. The critique of alternative investments, and particularly hedge funds, is that the correlation strengthens during economic downturns or times of market instability. Additionally, hedge funds or alternative investments do not offer the historically low correlation when an investor is in dire need of diversification to reduce equities volatility.
Liquidity: Liquidity might differ between benchmarks and funds, but it is often much lower than traditional investing. In actuality, the majority of hedge funds impose a lock-up period during which investors can only make withdrawals on a monthly, quarterly, or even annual basis. Private equity funds may be able to hold onto money for much longer. Because one needs to have a longer investment horizon than with traditional assets, investing in alternative assets takes more patience from investors.
Limited regulation: Regulatory organizations do not have as much control over alternative funds and alternative strategies, which gives them the freedom to perhaps use investment techniques that could increase returns. Naturally, you would anticipate that carries more danger.
Value: Unlike traditional assets, alternative investments do not undergo a mark-to-market process. This is particularly true of private investments in private equity, where there is no daily investment valuation.
How Can Alternative Investments Be Useful to Investors?
Pension funds, endowments, and high net worth people that are ready to put their money into less regulated investments with a lot less liquidity and a lot more risk are the main investors in alternative investments. Only those with sufficient wealth or income are permitted to invest in these less regulated ventures in some jurisdictions. High net worth persons are subject to many regulations that limit their access to alternative investments. Alternative investments are used by investors to diversify their holdings and improve their risk/return profile. Because these assets perform differently from conventional stock and fixed income investments, it is anticipated that they will act as a buffer during the economic cycle. Data on whether the sector as a whole has been able to do that is quite conflicting, especially during times of intense market stress.
What Are The Alternate Investment Fund Categories According To SEBI?
There are three categories of Alternative Investment Fund, which are given below:
Alternative investment funds invest in startups, early-stage ventures, or any other sectors that the government or the regulator considers socially and economically viable. E.g. Angel Fund, Venture Capital Fund, SME Funds, Social Venture Funds, Infrastructure funds, etc.
Alternative Investment Funds that don’t fall in Category-I and Category-III and don’t undertake to borrow other than meet day-to-day operational requirements. The government or any other regulator gives no incentive or concessions.
Various funds such as real estate funds, private equity funds, funds for distressed assets, etc., come under this category.
Alternative Investment Funds such as hedge funds or funds that are traded to make short-term returns or other open-ended funds and for which the govt or any other regulator gives no specific incentives or concessions. E.g. Hedge Fund, PIPE Funds.
Alternatives Investment Funds provide benefits of diversification, risk mitigation, and enhanced returns.
Benefits of Investing in Alternative Investment Funds
When people invest in a fund, they evaluate the benefits of an Alternative Investment Fund.
There are several benefits of AIFs given below –
- Know about the Tax Benefits
- Identify the Passive Investments
- Look at the direct ownership.
- Uncorrelated with the stock market
Pros and Cons of Alternative Investment Funds
|Pros of Alternative Investment Funds||Cons of Alternative Investment Funds|
|Potentially less volatility overall: |
Alternative investments may aid in lowering overall volatility within a portfolio of traditional investments because of their performance’s historically low to moderate correlation with market indices.
Possibility of improved performance:
The rate of return on alternative investments is not guaranteed, just like with any other investment. The strongest returns, however, were seen in residential real estate, according to a research titled “The Rate of Return on Everything, 1870-2015,” which examined performance across 16 advanced economies over a 145-year span.
Diversification across markets, methods, managers, and investing philosophies is often achieved with the aid of alternative assets.
|Lack of supervision: |
There are no regulations or reporting requirements for alternative investments. In addition, it can be challenging to evaluate the underlying assets of alternative investments, which creates problems with pricing and price transparency.
Alternative investments are frequently private rather than public, and they typically have decreased liquidity ranging from monthly to 12+ years, making them potentially difficult to exit and perhaps tying up your money for a long time.
Alternative investments are frequently intricate financial instruments that may need for a higher standard of due research. If you’re thinking about making an alternative investment, be sure to do your investigation and comprehend any potential tax repercussions.
Hefty minimum investments:
Alternative investments frequently have high minimum investment requirements and may not be accessible to all investors. Alternative investments also typically have greater costs.
Types of Alternative Investment
- Hedge Fund – A hedge fund uses funds collected from accredited investors like banks, insurance firms, High Net-Worth Individuals (HNIs) and families, and endowments and pension funds. Hedge fund managers trade globally in currencies, equities, commodities, and bonds. SEBI registration is not necessary for the hedge fund. It is also unnecessary to disclose their NAV periodically like other mutual funds. Investments should be extremely high and make high-risk investments.
- Private Equity (PE) Fund – The fund that invests in the equity of private companies intending to exit at higher valuations in the future. They take public companies private and use Leveraged Buy-Out (LBO) strategy. Higher leverage, higher risk, and higher expected return in this investment.
- Venture Capital – Venture capital funds are the subset of private equity funds. These are professionally managed funds invested in young companies with potential. Venture capitalists provide expertise and mentorship and act as a litmus test of where a business organisation is going, evaluating business from a sustainability point of view.
Venture capital funds invest in these early-stage companies in exchange for equity, or an ownership stake, in the companies they invest in. Business startups face high uncertainty, and Venture Capital investments have high failure rates.
- Real Estate is the equity and debt investment in residential and commercial property. Investment can be made by Real Estate Investment Trusts (REITs). REITs are private investment vehicles that own properties or associated loans.
- Infrastructure Fund means investing in infrastructures like water pipelines, toll roads, ports and airports and growing business through private equity.
A tangible investment is an item you can hold in your hands. It is an investment in a material, physical, or immovable object or piece of real estate. Financial investments like stocks, bonds, mutual funds, and other financial instruments are in opposition to this. Some assets, like collectibles, are held only for their potential to increase in value, while others, like equipment held for lease, are held for the revenue they produce while they decline. Others, like rental real estate, show a mix of characteristics, increasing in market value while decreasing in book value. Timberland shows a decline in the amount of wood but also increasing land value. Other assets, such as commodities, which are liquid investments in contrast to the majority of other physical investments, vary in value according to supply and demand.
Non-financial assets that lack material or financial substance are known as intangible assets. They cover a wide spectrum of extremely diverse assets, including as human capital, cutting-edge goods, trademarks, software, customer relationships, databases, and distribution networks. Some of these assets help businesses use new technology more productively and efficiently, and as a result, they play a critical part in how much value businesses create. This section examines the traits of intangibles and several consequences of their growing significance.
Every investment has its profit and loss. Many times, alternative investment funds can be treated as passive investments. In an Alternative Investment Fund, a large initial investment is required, and it is out of reach for small-scale investors.
SBICAP Ventures Limited manages the fund.
Corpus is the total amount of funds committed by investors to the AIF through a written contract or any such document on a particular date.
The certificate of an AIF registration shall be valid until the AIF is wound up.
The registration fee to be paid by an AIF is as under
|Category I AIFs||Rs. 5,00,000|
|Category II AIFs||Rs. 10,00,000|
|Category III AIFs||Rs. 15,00,000|
|Angel Funds||Rs. 2,00,000|
Any scheme of the AIF’s tenure is calculated from the date of the final closing of the scheme.
Since alternatives depend more on the strength of each individual investment than on broader market patterns, they may help to lower a portfolio’s overall risk. Alternatives can be a good method to diversify your portfolio because they have little connection to conventional asset types.
Mutual funds or exchange-traded funds (ETFs) that invest in non-traditional securities are known as alternative funds. Leveraged loans, commodities, and real estate are a few examples of them. The majority of people do not always need these monies. But if used properly, they can serve as diversification instruments.
In addition to being less liquid than traditional securities, alternative investments also have a tendency to be less complex to evaluate because of their limited trading volume.
Also Read: Types of Fixed Deposits in India