Most of you reading this must have some knowledge of finance, investments or the stock market. (If not, that’s fine – it’s what we’re here for!) Surely you must have realized that the global economy has taken a hit recently. This is owing to the long-lasting effects of the pandemic and other international issues. In such uncertain times, investing in stable assets such as treasury bonds or digital gold is advisable (head on to Fello to learn more about digital gold).
However, we all want to find that one golden stock that is still going strong! What if we said there are investment instruments that deviate from the broader stock market trends? What if these instruments rely on unique investment strategies? With a low correlation to traditional financial assets, these instruments can diversify your portfolio and reduce the overall market risk. Sounds too good to be true?
Scroll on to learn more about AIF or Alternate Investment Fund!
What Is An Alternate Investment Fund (AIF)?
Alternative Investment Fund (AIF) is a unique investment category that differs from traditional investment instruments. More specifically, it is a privately pooled investment fund that adheres to the SEBI (Alternative Investment Funds) Regulations of 2012.
An AIF can be established as a corporation, trust, limited liability partnership (LLP), or any other legal entity in India, to receive funds from investors, both domestic and international, to invest in accordance with a specific investing strategy to generate profits. Naturally, it’s not the same as investing in any other asset on the financial market.
So, What Is The Benefit Of Investing In AIF?
Why should you consider investing in AIF? Here are the main reasons –
- High Return Potential – AIFs offer a higher return potential compared to other financial investments. The huge amount of privately pooled funds allows trustees and managers to deploy various diversification strategies to maximise returns.
- Low Volatility – These funds have relatively lesser instability compared to typical equity instruments. They do not correlate to the overall behaviour of the stock market. AIF can be an excellent investment for risk-averse investors or simply to diversify your portfolio.
- Diversification Of Portfolio – Alternative Investment Funds provide the much-needed diversification in an investment portfolio. They act as a buffer during financial crises or periods of market volatility.
- Passive Investment Instruments – Most investors place a high value on the amount of time and effort it takes to manage their portfolio. With AIF, investors do not need to actively manage their investments. The funds are handled by trustees and asset managers.
If you’re invested (pun intended!) in the concept and are thinking of Googling the best types of AIFs to invest in, here’s what you need to know.
What Are The Various Types Of AIFs?
The various kinds of AIFs are based on their objectives and financial regulations, which SEBI (Securities and Exchange Board of India) has split into three groups:
These funds invest in small and medium-sized businesses (SMEs) as well as new economically viable organisations with strong development potential. These could be startups, early-stage business ventures and social projects. The main investment vehicles in this category are:
- Venture Capital Fund (VCF) – Innovative entrepreneurial ventures that need capital in their early days approach VCFs. These funds invest in high-growth potential start-ups and assist them in overcoming their initial financial crunch. Individuals who invest in VCFs take a “high-risk, high-reward” approach to fund allocation.
- Angel Funds – These funds invest in emerging businesses and bring with them managerial skills needed in the early stages of a business. Angel funds invest in start-ups that are not funded by VCFs. Each angel investor must make a minimum investment of Rs 25 lakh.
- Infrastructure Funds – These funds invest in infrastructure businesses that build railways, airports, ports, roads, etc. and are favoured by investors who believe in the growth of infrastructure in India.
- Social Venture Funds – These funds invest in socially responsible businesses. Think of them as altruistic investments which also have the potential to generate substantial returns for investors. In fact, it has its own term called Venture Philanthropy. #TheMoreYouKnow
AIFs that do not borrow money unless it’s for their day-to-day operations and are not classified under Category I or II belong to this category. Alternate Investment Funds that are considered a part of Category II funds are:
- Private Equity (PE) Funds – These funds invest in private enterprises that are not publicly traded. PE Funds are favoured by such enterprises as it is difficult for unlisted businesses to raise capital by issuing equity and debt instruments. However, these funds come with a lock-in period that spans from 4 to 7 years.
- Debt Funds – Debt funds primarily invest in debt securities issued by corporations that are not publicly traded. Typically, the companies chosen follow good corporate governance approaches and have a lot of room for growth. However, because these funds have a low credit rating, conservative investors should avoid them.
- Fund Of Funds – These Alternate Investment Funds invest in other Alternate Investment Funds. They don’t have a set investment portfolio and instead invest in a variety of other AIFs. Yes, we know how meta that sounds! #AIF-ception
AIFs that employ diverse or complex trading strategies by investing in listed and unlisted derivatives fall under this category, commonly known as “hedge funds.” The two main funds under this category are:
- Private Investment In Public Equity Fund (PIPE) – A PIPE invests in publicly traded shares by purchasing them at a bargain. Due to less paperwork and better management, investing through PIPE is more convenient when purchasing shares of securities that have already been issued, that is, any share whose initial public offering (IPO) has already happened.
- Hedge Funds – Hedge funds are investment vehicles that pool money from certified investors and institutions. The collected funds are invested in debt and equities markets both domestically and internationally. To create returns for investors, these funds use an aggressive investment strategy. However, hedge funds are also costly as fund managers can charge a portfolio management fee worth 1% of the assets they manage. Alternatively, they can charge up to 20% of the profits generated as fees.
Phew, that was a long list but those were all the categories of AIF available in India. However, just to be extra cautious (and it always pays to be when it comes to money!), let’s look at some of the misconceptions about AIF.
What’s Not Considered As An Alternate Investment Fund?
The following financial instruments are not Alternate Investment Funds –
- Mutual Funds
- Collective Investment Schemes
- Employee Stock Options
- Trusts (including Employee Welfare Trusts, Family Benefit Trusts, Gratuity Trusts, etc.)
- Holding Companies
Essentially, any financial instrument created for the purpose of obtaining capital from individuals – with the intention to invest in assets to make a profit can qualify as AIFs. With that out of the way, let’s check if you’re eligible to invest in an AIF, shall we?
Who Can Invest In AIF?
Anyone who meets the following eligibility criterion can invest in AIFs:
- Alternate Investment Funds are open to Indian residents, non-resident Indians and even foreign nationals.
- Investors need to invest a minimum of Rs. 1 crore, while directors, staff and fund managers are expected to invest a minimum amount of Rs. 25 lakhs.
- Investors need to invest for a three-year period at a minimum.
- Every Alternate Investment Fund is limited to 1000 investors, with the exception of angel funds, which cannot have more than 49 angel investors at once.
That’s the checklist you need to be aware of when it comes to Alternate Investment Funds. Now that we know what an Alternate Investment Fund is, the benefits of investing, the different categories and the eligibility criterion, it’s time to discuss the most critical aspect – how to register and invest in Alternate Investment Funds!
How To Register An Alternate Investment Fund?
To register an Alternate Investment Fund, you need to follow these steps:
Step 1: Applying To SEBI
An applicant needs to apply using the Form A of SEBI (Alternative Investment Funds) Regulations, 2012, along with the necessary documents and a business plan.
Step 2: Providing An Authorization Letter
The applicants must provide an authorization letter in case the applicant has authorized a director, promoter, manager or any officer to act as an authorized guarantor for the fund.
Step 3: Reviewing SEBI Compliances
To ensure that the applicant is eligible to register an AIF, they must review the SEBI guidelines thoroughly to be compliant.
Step 4: Attaching A Cover Letter
If the applicant is a venture capital fund registered with SEBI, they must furnish that information in their cover letter. The cover letter should also state whether the applicant has been involved in an existing AIF or is applying for a new one.
Step 5: Final Submission Of The Application
For the issue of a certificate of registration, a dated, duly signed and stamped Form A, accompanied by essential documents and the corresponding registration fee by way of a draft made in favour of The Securities and Exchange Board of India, Mumbai, must be provided. This is the final submission to be made by the applicant.
Step 6: Reviewing Of The Application
SEBI will review and respond to an application within 21 days after receiving it. The application is examined for its correctness in accordance with SEBI guidelines, and if found satisfactory, the application is approved.
Step 7: Granting The Certificate Of Registration For Alternate Investment Fund
As the last step in the process, SEBI grants the applicant a certificate of registration once the fees are disbursed. Applicants need to be aware of the registration fees for the three different categories of AIFs, as follows –
- Rs. 5,00,000 if the application is for AIF Category I
- Rs. 1,00,000 if the application is for AIF Category II
- Rs. 15,00,000 if the application is for AIF Category III
Now that your (hypothetical) AIF is set up, let’s explore how investors can invest in it.
Investing In An Alternate Investment Fund
It’s quite simple, just follow these rules!
- For each fund, investors must have a minimum corpus of Rs. 20 crores (except Rs. 10 crores for an Angel Fund).
- Category III AIFs are both open and closed-ended. But Category I and II AIFs are closed-ended. An open-ended fund allows investors to redeem their investments, whereas a closed-ended fund does not.
- The AIF’s fund manager or sponsor must retain a 2.5 per cent vested interest in the initial corpus.
- Every individual investor must provide proof of identification and proof of income.
Although AIF requires higher capital investment, we can agree that it is a compelling, one-of-a-kind financial investment option for investors seeking high returns. Start your AIF investment journey here!