Updated: Sep 1, 2019
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A few years back the only way to invest money in India was through traditional stocks, mutual funds or real estate. With the increase in High net worth individuals and emerging high net worth individuals (ones having an investible surplus of INR 25 lacs to 2 crores) there is a steady rise in demand for non conventional investment avenues such as AlF (Alternative investment funds).
Over the last few years AIF's like Venture capital has attracted more high net worth individuals as thousands turned to millions and then those millions sometimes even billions.
The rich of India see Venture capital, hedge funds and Private equities as an unconventional way of investing. Also it satisfies step 4 in Maslow's theory - the self esteem need of people (the rich get satisfaction by giving back to society in terms of creating jobs and supporting innovative minds).
To begin with lets start with what are Alternative Investment Funds,
AIF's are a class of pooled in vehicles for investing in real estate, private equity and hedge funds. AIFs are privately held and managed pool of investment fund of either domestic or foreign origin, organised in the form of an LLP (limited liability partnership), corporate body, company or trust. AIFs are seen as private investment funds, and therefore, are not available through IPOs (initial public offerings) or other forms of a public issue which are applicable to Collective Investment Schemes and Mutual Funds that are registered with SEBI. There are no stringent regulations developed yet by SEBI for Alternative Investment Funds hence they are associated with having a greater risk in comparison to stock investments or mutual funds.
Types of AIF
1.Category I: Venture Capital Funds, Startup / Early stage funds, Infrastructure funds – These are those AIFs which are positive and beneficial to the Indian economy and enhance growth. Hence, these funds receive incentives or concessions by SEBI or the government of India. Such funds generally invest in start-ups or early-stage ventures, social ventures, SMEs, infrastructure or other sectors which are considered socially or economically important for the country.
2.Category II: Private equity funds – Private equity (PE) funds, especially Real Estate PE funds, typically reduce the risk profile by offering diversified investment portfolios managed by experienced fund managers. Thus, it provides the dual benefit of a defensive investment alternative as well as a hedging mechanism by offering an alternative investment asset class.
3.Category III: Hedge funds – Category III AIFs are a unique class of privately pooled funds that employ a range of complicated trading strategies including but not limited to arbitrage, margin trading, futures and derivatives trading, etc. to generate returns. This category of AIF is also allowed to utilize leverage in order to make investments in both unlisted and listed derivatives as specified by SEBI (Alternative Investment Funds) Regulation, 2012. Leading examples under this alternative investment fund category include PIPE Funds and Hedge Funds.
Structure of AIF's
When you invest in AIF as an investor, you will be termed as Limited partner ( there is a minimum threshold to subscribe as an investor in a hedge fund or venture capital) since the liability is limited to the amount of capital contributed, but the advantage is that the profit or return generated is not capped by any limit. Fund managers of AIF's are generally termed as General partners, General partners generally earn through means of management fees charged from Limited partners and incentive fees charged at fixed rate or as per terms and conditions of the agreement. Generally incentive fee is only paid by investors if the fund is earning returns above a specific hurdle rate (Hurdle rate can vary depending upon terms and conditions of the agreement entered in by GP's and LP's).
Benefits of investing in AIF's
The alternative investment funds primarily do not relate to stock market which means they add more diversification to portfolio along with less volatility of the stock market. While, just like any other investment, the rate of return for AIFs is not guaranteed, there is potential for it to be higher than that of traditional investments through inflation hedging and robust diversification. However, alternative investments are more complex and have higher fees associated with them than traditional investment vehicles. Moreover, the majority of AIFs are invested in illiquid investments, making them difficult to exit and price on a regular basis. And as with any investment, the potential for a higher return also means higher risk.
With increase in wealth of the people of India and increasing awareness of investing in alternative modes of investment, AIF modes like Hedge funds, Private Equity and REIT's would definitely becoming popular over the following years since the risk appetite and sophistication of people willing to put considerable amount of money in market can't be borne by stock market alone.
Some of the growing and successful AIF's in India are listed below,
1. Real estate - Embassy's REIT (India's first REIT launch in March 2019)
2.Private Equity - ICICI Venture Fund Management, Blackstone Group, India Value Fund
3.Hedge Funds - Avatar Investment Management, Atlantis India Opportunities Fund, India Capital Fund
Due diligence and education are very important for a successful investment, a long term view of your investment is essential when planning the buckets of your Investment. You should be able to identify and correlate the returns as well as the risk of the investment you are willing to put in any form or mode of Investment. Diversification across unrelated asset classes is not easy, you need to maintain a long term horizon and should have the patience and ability to mitigate the volatility whether caused by external or internal forces. AIF's definitely have the scope to increase and grow in Indian market with more foreign institutional investors aiming to invest in India and also government providing various opportunities in the Union Budget 2019-20 to Venture capitalist and Start Ups.
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