Alternate Investment Fund
An Alternative Investment Fund (AIF) is a distinctive investment category, diverging from traditional instruments, characterized by private pooling. Typically attracting institutions and high-net-worth individuals, AIFs require significant investments and operate under the SEBI (Alternative Investment Funds) Regulations, 2012, with formation options including companies, Limited Liability Partnerships (LLPs), trusts, etc.
Types of AIFs in India
SEBI classifies Alternative Investment Funds into three categories:
Category 1:
These funds target SMEs, start-ups, and economically viable businesses with high growth potential, including Venture Capital Funds supporting start-ups, Angel Funds for early-stage investment, Infrastructure Funds investing in construction projects, and Social Venture Funds supporting socially responsible businesses.
Category 2:
Encompassing Private Equity Funds for unlisted private companies, Debt Funds investing in debt securities, and fund of Funds that invest in other Alternative Investment Funds.
Category 3:
Involving Private Investment in Public Equity Funds (PIPE) investing in publicly traded company shares, and Hedge Funds pooling money from accredited investors and institutions for an aggressive investment strategy across domestic and international markets, though they are relatively expensive with management fees and potential returns levy.
Who Can Invest in an AIF?
Those seeking portfolio diversification through AIFs must meet these eligibility criteria:
1. AIFs welcome investments from Resident Indians, NRIs, and foreign nationals.
2. Investors are required to commit a minimum of Rs. 1 crore, while directors, employees, and fund managers have a minimum investment amount of Rs. 25 lakh.
3. AIFs impose a mandatory minimum lock-in period of three years.
4. The maximum number of investors is capped at 1000 for most schemes, except for angel funds, which allow up to 49 investors.
Benefits of Investing in AIFs
Investing in AIFs offers several advantages, including:
1. High Return Potential: AIFs typically present a greater potential for returns compared to alternative investment options. The substantial pooled capital provides fund managers with the flexibility to devise strategies aimed at maximizing returns.
2. Low Volatility: AIFs are not directly correlated with stock markets, resulting in lower volatility, especially when compared to traditional equity investments. This characteristic makes them appealing to risk-averse investors seeking stability in their portfolios.
3. Diversification: AIFs contribute to essential portfolio diversification, serving as a protective measure during financial crises or market fluctuations.