We've observed through the years that the only method to build financial assets in our country was to invest in classic or conventional investment categories like stocks, bonds, cash, real estate, and so on. However, in recent years, we have developed non-traditional investing options such as Alternative Investment Funds, or AIFs, which are growing increasingly popular in India and around the world.
Alternative investments include investments in real estate, private equity, land, venture capital, intellectual property, and equity long-short strategies. The Alternative Investment Funds will be discussed in this section.
Alternative Investment Funds (AIFs)
AIFs are defined in regulation 2(1) (b) of the SEBI Regulations, 2012 (Securities and Exchange Board of India). There is no regulatory body in India that oversees these funds. Because the funds are funded by privately pooled investment funds from India or other foreign sources in the form of a trust, business, or limited liability partnership, they are classified as Alternative Investment Fund.
According to a March 2019 report, alternative investment funds poured in about INR 1.10 lakh crore in the January-March quarter, a 79 percent increase over the previous year.
What funds are included in the AIF?
The following funds are covered by the AIF:
- Funds for Venture Capital
- PIPE (Private Investment in Public Equity) Funds are a type of PIPE (Private Investment in Public Equity) fund that invests in public
- Fund of Private Equity
- Debt Management Funds
- Infrastructure Equity Fund is a fund that invests in infrastructure.
- Real Estate Investment Trust
- SMALL BUSINESS
- Funds for Social Entrepreneurship
- Fund for Strategic Planning (Residual Category, including all varieties of funds such as hedge funds, if any).
What types of Alternative Investment Funds are there?
The AIFs will have to register with one of the three categories listed below, according to the Securities and Exchange Board of India.
1st Category
Entrepreneurs that are passionate about launching a business can choose Category 1. It includes funds that invest in start-ups, small firms, and new ventures that have strong growth potential and are socially and economically viable. The Indian government places a premium on and promotes this type of investment since it has a cumulative effect on economic growth and job prospects for young people.
The funds that fall under Category 1 include:
VCF (Venture Capital Fund)
Venture Capital Funds are the preferred investment option for High Net worth Investors (HNIs) who believe that great risk is directly proportional to high return. Investors invest in various companies to help them overcome financial constraints in their early stages, depending on the businesses' profiles, asset size, and product development stage.
Infrastructure Fund (IF) investors invest in the construction of public infrastructure such as roads, railroads, airports, and communication assets, among other things. In addition, the Indian government offers tax breaks for infrastructure expenditures.
Angel investment fund
An angel fund is a type of venture capital in which fund managers combine funds from a number of angel investors. Investors receive dividends after receiving returns on their investments. Because the growth of these start-up companies is uncertain, these investors invest in the angel fund to increase productivity.
Funds for Social Entrepreneurship
Companies that aim to make a profit while also addressing environmental and social challenges receive funding from Social Venture Funds. They mostly invest in projects in underdeveloped nations that are nearing completion because they have a strong potential for social development and growth. 2nd category
The second category comprises funds that invest in a variety of stock and debt instruments. The government does not provide any tax breaks or incentives to investors in these vehicles.
Category 2
The following types of funding are included in Category 2:
Fund of Private Equity (PE)
The Private Equity Funds invest in private companies that are not publicly traded and have a fixed investment horizon of 4 to 7 years. The corporation earns a substantial profit after seven years.
Debt Management Fund
Debt funds invest in both public and unlisted corporations' debt instruments. Debt fund investors are mostly interested in enterprises with a low credit score. Furthermore, SEBI Regulations state that the money invested in the Debt fund cannot be utilized to make loans.
Mutual Funds of Mutual Funds
Funds of Funds, as the name implies, do not target a certain sector to invest in. Rather, they put their money into the portfolios of other AIFs. In addition, unlike mutual funds, they are unable to issue publicly traded fund units.
3rd category
The following funds are included in the 3 Category Funds
Hedge funds aggregate capital from a variety of institutional and accredited investors and invest it in domestic and international markets in order to earn higher returns. The asset management fees are usually charged at a rate of 2%.
Investment in Public Equity Funds by the Private Sector (PIPE)
PIPE is a privately managed pool of cash from private sources that are utilized to invest in public equity. The investor will buy a stake in the company in order to help it expand.
What are the best Alternative Investment Funds to invest in?
- SBI Small Cap is a mutual fund managed by SBI.
- Mirage Asset Emerging Blue-chip Fund is a fund that invests in emerging bluechip companies.
- Canara Robeco Emerging Equities Fund is a mutual fund that invests in emerging markets.
- Nippon India Small-Cap Fund is a fund that invests in small-cap companies in India.
- Kotak Emerging Equity Fund (Kotak Emerging Equity Fund) is
- ICICI Prudential All Seasons Bond Fund is a bond fund managed by ICICI Prudential.
- Franklin India Dynamic Accrual Fund is a mutual fund that invests in India.
- Magnum Medium Term Fund (SBI Magnum)
- Axis Strategic Bond Fund is a mutual fund that invests in government bonds.
- PGIM India Dynamic Bond Fund is a mutual fund that invests in India.
- HDFC Hybrid Equity Fund is a hybrid equity fund managed by HDFC.
- Sun Life Aditya Birla Balanced Advantage Fund
The Advantages of Alternative Investment Growth
- Investors must not be under the impression that investing in insurance risk exposes them to the financial consequences of insurance losses. However, because these dangers cannot be entirely assessed in advance, they can be administered and managed.
- The investors receive a premium for taking on the basic risk, and they receive an investment return on the assets they invest. From a portfolio standpoint, the biggest benefit is real diversification.
- There is also a significant societal and economic benefit. The more pension funds and other large investors participate in insurance risk, the lower the cost of insurance will be and the greater the capacity to insure.
- As a result, the volatility of property insurance pricing will be reduced, the insurance market will be more stable, and people who cannot afford insurance will have more access to it.
- The end result will be a reduction in the negative economic impact of natural catastrophes on the economy, since people who are harmed will be able to recover faster without the need for government assistance.
- Alternative investments will make up a modest portion of the majority of investors' total portfolios, but with the appropriate investment strategy, they can have a significant influence.
What is the duration of Alternative Investment Funds or Schemes, as well as their listing?
Categorization 1 and 2
The duration of the Alternative Investment Funds launched under Category 1 and Category 2 is established at the time of application. In addition, the duration must be at least three years.
3rd category
AIFs in category 3 might be open-ended or closed-ended.
The most successful investors are those who think about their investment strategy over a long period of time. At the same time, if you want to compare the volatility of conventional and non-conventional funds, Non-conventional AIFs are a good choice.
