Table of Content:
- Benefits of Investing In Alternative Investment Funds
- CATEGORY I
- CATEGORY II
- CATEGORY III
- Who Can Invest in Alternative Investment Funds?
Alternative Investment Fund(AIF) is breathing new life into the real estate market. Differing from traditional forms of investment like stocks, debts, and securities, AIF are the funds pooled to invest in venture capital or hedge funds.
Benefits of Investing In Alternative Investment Funds
1. Portfolio Diversification
AIFs not only act as a shield in times of market instability or financial catastrophe, but also offer a unique asset allocation and a diversification to investment portfolio.
2. Hedge Against Volatility
The returns under AIF remain constant despite market ups and downs. Additionally, as AIFs do not invest in publicly traded securities, stakeholders are not subject to share price fluctuations.
Also, AIFs are one of the best investment choices if you're trying to stabilize your portfolio.
3. High Return Potential
Alternative investment funds have a higher return potential than any other investment option. The pooled amount gives fund managers enough room to prepare flexible strategies for promising returns.
The regulatory framework put in place by Securities & Exchange Board of Indi(SEBI) will promote capital formation and go a long way towards satisfying India's stringent standards for real estate investment.
Alternative investment funds are recognized under Regulation 2(1)(b) of the Regulation Act of 2012 of SEBI.
According to the SEBI guidelines, AIFs function in three categories:
CATEGORY I:
AIFs engage in new businesses, SMEs, infrastructure, or other sectors that regulators or the government deem economically or socially desirable. The government promotes these investment projects, especially because they have a multiplier effect on the economy and create job opportunities.
This category includes venture capital funds, SME funds, Angel funds, Infrastructure Funds and Social Venture capital funds. We have explained some of them below:
Venture Capital Funds: They invest in potential companies but are experiencing financial difficulties and need money to start or grow their businesses.
Infrastructure Funds: The funds invested are used to develop community assets like road and rail infrastructure, airports, etc.
Angel Funds: It is similar to venture capital, where fund managers pool money from various angel investors and invest in promising startups for their growth.
Social Venture Fund: This fund invests in organizations with solid social backing that aim to bring about real societal change.
CATEGORY II:
This alternate investment fund consists of private equity funds or debt funds. However, there are no particular incentives provided by the government. Private equity funds, debt funds, funds of funds, real estate funds, and funds for distressed assets fall under this category. Some of the subcategories are explained below:
Private Equity (PE) Fund: Two goals drive unlisted private enterprises into private equity funds: first, they cannot raise capital by issuing equity or debt instruments. Secondly, PE works by investing heavily in unlisted private organizations and, in exchange, taking a share of their ownership.
Debt Fund: The funds invested in the debt instruments of organizations listed and not listed are known as debt funds. These organizations have low credit scores, issue high-yield debt securities, and have high risks.
Fund of Funds: This is created by amalgamating many alternative investment funds. The fund aims to invest in a portfolio of AIFs.
CATEGORY III:
These AIFs fall within open-ended funds or funds that provide short-term gains.
These do not have any particular incentives or concessions provided by the government or another regulator.
Hedge Fund: It combines capital from institutional and accredited investors and invests in domestic and international markets to generate higher returns.
Private Investment in Public Equity Fund: To create a privately managed pool, privately sourced funds must be set aside specifically for investments in public equities.
Who Can Invest in Alternative Investment Funds?
- Indian residents, NRIs, and foreign nationals can become investors in these funds.
- Investors have to invest a minimum of Rs 1 crore, while directors, employees, and fund managers can invest a minimum of Rs 25 lakh.
- AIFs have a three-year minimum lock-in duration.
- Except for angel funds, the number of investors in every scheme is limited to 1,000.
- No AIF investment opportunity may have more than 1,000 investors, except angel funds. Any scheme that uses an angel fund cannot have more than 49 angel investors.
Alternative investment funds are a great investment opportunity for those looking to invest, mostly High Net Worth Individuals(HNIs). Before making any investments, one must conduct in-depth market research and choose an AIF category based on their risk tolerance and financial objectives.