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While traditional investment options like fixed deposits, stocks, and bonds are effective for long-term wealth creation, many sophisticated investors are now choosing Alternate Investment Funds (AIFs). These high-risk financial instruments promise incredible returns by investing in different asset classes. AIFs have recently gained immense popularity among high-net worth individuals looking to grow their portfolio.
Let’s understand these funds in detail and what makes them so popular.
In a nutshell, AIFs are pooled investments that further invest in venture capital, hedge funds, private equity, and futures. AIFs were introduced only in 2012 by the Securities and Exchange Board of India (SEBI), but they have gained immense prominence with countless investors.
Alternate Investment Funds (AIFs) allow high-net worth investors to access assets that may not directly linked to the stock market. It also offers them diversification and potentially higher returns on investments as compared to mutual funds and bonds.
How has the Indian AIF Industry grown over a period of time?
Investments raised by AIFs reached around Rs. 2.13 lakh crore by December 2020, posting a 76.6% CAGR between 2014-20. During this period, commitments for investments reached Rs. 4.42 lakh crore (68.0% CAGR) and investments by AIFs in alternative assets reached rs. 1.85 Lakh crore (78.4% CAGR).
AIFs come in three broad categories. They are:
AIFs that invest in SMEs, start-ups, and other smaller businesses with high growth potential, fall under this category. What’s more, the Government of India offers tax incentives to individuals to invest in this category. Why? Because investments in Category I seem to produce a multiplier effect in the economy in terms of wealth and job creation.
Here are the AIFs that fall under Category I:
Venture Capital Funds (VCF): VCFs invest in start-ups with a high valuation but are facing a temporary shortage of funds for expansion. What VCFs do is pool money from independent investors and invest in high valuation ventures.
Infrastructure Funds (IF): These funds invest in the development of public infrastructure like rails, roads, bridges, dams, etc. Returns from this type of AIF is usually a combination of dividend income and capital gains.
Social Venture Fund (SVF): SVFs invest in organizations with a strong social consciousness. These companies solve environmental and social issues while making money.
Angel Fund: A type of VCF – here, venture capitalists pool money from several angel investors to boost start-ups or help them expand.
This category includes the following AIFs:
Private Equity (PE) Funds
PE funds allow you to invest in unlisted private organizations. Individuals who are looking to diversify their financial portfolio and add a potentially high-risk AIF go for this sub-category.
Fund of Funds: This fund clubs various AIFs into one.
Debt Fund: As the name suggests, this type invests in debt instruments of both unlisted as well as listed companies.
There exist two sub-categories under this type:
Private Investment in Public Equity Fund: These are pooled funds earmarked, especially for public equity investments.
Hedge Fund: Hedge funds collect capital from both individual investors as well as institution to invest in domestic and international markets for high returns.
Given the magnitude of returns AIFs are capable of offering, their popularity among high-net individuals and institutional investors continues to soar. Why them? The minimum investment in an AIF starts at Rs. 1 crore – something only a niche category of individuals and institutions can afford.
Even with minimum investment as high as Rs. 1 crore, AIFs continue to have more takers than ever. The underlying reason being that these funds allow investors to diversify their finances across a bespoke spectrum of assets that promise extraordinarily high returns. On the other hand, traditional investment instruments such as Mutual Funds (MFs) pose restrictions when it comes to hedging fund and investing in unlisted equity.
While AIFs make for a very lucrative investment, there is a primary learning curve attached to understanding them. If you wish to invest in AIFs, get financial guidance from one of the best in business – Tata Capital Wealth. Become a sophisticated investor with our team supporting and nurturing your wealth through bespoke wealth management solutions.
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