ALTERNATIVE INVESTMENT FUND
What is an Alternative Investment Fund (AIF)?
Alternative Investment Fund (AIF) is a pooled investment that invests further into venture capital, hedge funds, private equity, managed futures, and others. For uninitiated, AIF refers to an investment which is different from conventional investment avenues that includes debt securities, stock, and others. AIF can be formed or established in the form of a company or corporate or Limited Liability Partnership or trust body.
What are the types of Alternative Investment Fund (AIF)?
As per SEBI (Securities and Exchange Board of India), AIF can be classified into three categories
Category I: Funds that are invested in start-ups, new businesses, and SMEs – Small and Medium Enterprises. Businesses that are considered high growth potential, socially as well as economically viable, are considered under this category. Following funds would be
- Venture Capital Fund (VCF): VCFs are able to pool money from investors. HNIs – High Net Worth Investors – who seek higher returns on investment prefer investing in VCFs. Post inclusion of VCFs in AIFs, now, HNIs from international market can invest in VCFs.
- Infrastructure Fund (IF): These funds invest for development of public assets which includes road, airports, rail and communication assets and others.
- Angel Fund: It is considered similar to the type of Venture Capital fund where the funds are put together for start-ups for their development.
- Social Venture Fund: Investments on social projects have given rise to Social Venture Fund (SVF). They invest in companies with strong social conscience as well as aim at bringing change in the society. These companies focus on making profits together with solving environmental issues.
Category II: comprises of the following funds
- Private Equity (PE) Fund: The PE funds invests in unlisted private companies, and they take the share of the ownership. PE funds have a fixed investment horizon from four to seven years.
- Debt Fund: These funds invest in debt instruments of unlisted and listed companies.
- Fund-of-Funds: These funds are a combination of Alternative Investment Funds of varied types. They invest in portfolio of other AIFs. They make sure of investing in specific sector.
Category III: compromises of funds that are aimed at short-term returns. They deploy varied, diverse and complex trading strategies for achieving shortterm capital gain. It compromises of the following funds
- Private Investment in Public Equity Fund (PIPE): They are a privately managed funds which is sourced privately and earmarked for public equity investments. Private investment that is public equity refers to buying shares of companies which are publicly traded at a discounted price.
- Hedge Fund: The funds aggregate funds from accredited and institutional investors. They invest in international and domestic market for generating high returns.
Who Can Invest in an Alternative Investment Fund (AIF)?
Investors willing to diversify their portfolio can invest in AIFs if they meet the following eligibility criteria:
- Resident Indians, NRIs, foreign nationals can invest in these funds.
- The minimum investment limit is Rs. 1 crore for investors, whereas the minimum investment amount for directors, employees, and fund managers are Rs. 25 lakhs.
- AIFs come with a minimum lock-in period of three years.
- The number of investors in every scheme is restricted to 1000, except angel funds. Where the number of investors goes up to 49.
- Must have a minimum corpus of Rs. 20 Cr. for any particular scheme or Rs. 10 Cr. in case of an Angel Fund.
- While Category I & II AIF can only be close-ended, Category III can be both open and close-ended.
- The fund manager or AIF sponsor must have continued vested interest of 2.5% of the initial corpus.
- Every individual investor has to submit id proof, pan card, and proof of income.
Advantages AND Disadvantages
- Counterweight to conventional assets
- Portfolio diversification
- Inflation hedge
- High rewards
- Difficult to value
- Fewer regulatory requirements