AIFs are privately pooled investment funds, typically formed as a trust or a company, Limited Liability Partnership or body corporate in India. They are formed with the objective of investing it in accordance with a defined investment policy.
The term 'Alternative' means that these funds offer an alternative way to invest, which can be different from the conventional ways of investing. This could mean putting money into a fund which invests in assets like real estate, private companies, commodities or even artwork. Here the risks are generally higher, but the potential rewards can be high as well.
The Securities and Exchange Board of India (SEBI) classifies AIFs into 3 categories:
AIFs in India have made impressive strides since their inception. SEBI officially recognized AIFs and set regulatory frameworks for them in 2012, marking the birth of this investment vehicle in the country.
Initially, AIFs were slower to take off due to the complex nature of investments and a high entry threshold. However, their flexibility, the possibility of higher returns, and the uniqueness of investment opportunities started to catch the attention of high-net-worth individuals, institutional investors, and even savvy retail investors.
Over time, AIFs began experiencing a surge in interest, especially with the rise in Category III funds that dabble in derivatives and complex trading strategies. These funds offered an alternative, possibly lucrative, but high-risk investment avenue that piqued investors' interest.
As of March 2023, the total investment commitments stand at a whopping INR 3.37 lakh crore, showcasing the increasing trust and interest in AIFs. This is a 450% rise from INR 61.4 thousand crores in March 2018.
SEBI has laid down certain criteria that investors need to meet to invest in AIFs in India:
Distinguished by their investor base, AIFs tend to cater to affluent individuals and entities who can meet the minimum investment threshold of INR 1 crore, a stark contrast to mutual funds and REITs, where barriers to entry are significantly lower. The high entry point for AIFs ensures an investor pool with high risk appetite and investment acumen.
Regulation-wise, while AIFs, Mutual Funds, REITs, and Portfolio Management Services (PMS) are all governed by SEBI, their regulatory frameworks differ. AIFs operate under regulations allowing for strategic flexibility, permitting more complex and risky investment approaches.
Unlike PMS, AIFs pool resources from multiple investors, fostering risk-sharing and potentially enhancing portfolio diversification.
To put it succinctly, AIFs offer an investment gateway that merges sophistication with strategic flexibility, albeit with a higher risk-return trade-off. This distinctive blend sets them apart in India's dynamic managed portfolio landscape.
Here are some factors to consider before you decide to invest in AIFs β
In conclusion, AIFs have opened up new opportunities for sophisticated investors seeking alternative avenues for portfolio diversification. They are a significant addition to India's investment landscape, offering investment strategies that can potentially deliver higher risk-adjusted returns.
However, as with any investment, it's essential to understand your financial goals, risk tolerance, and investment horizon before committing your capital. A comprehensive understanding of AIFs and thorough due diligence is key to reaping the potential benefits of this alternative investment vehicle.