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All About AIFs (Alternative Investment Funds)

17 May 2023 - Tushar
Reading time about 3 minutes

Alternative Investment Funds (AIFs) are fast gaining popularity as a viable investment option in India. These funds offer a range of investment opportunities to high net worth individuals (HNIs), institutional investors, and sophisticated investors looking to diversify their portfolios. As of date there are more than 500 AIFs registered with SEBI in India. In this post, we explore the world of AIFs in India and why they are a compelling investment choice.

What are Alternative Investment Funds (AIFs)?

As per [SEBI definitation]https://www.sebi.gov.in/sebi_data/commondocs/AIFregulations2012_p.pdf){:target=”_blank”}, Alternative Investment Funds or AIF means means any fund established as Trust or a Company or a LLP which is a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors. In simple terms Alternative Investment Funds (AIFs) are investment vehicles that pool money from investors to invest in assets such as real estate, private equity, hedge funds, and commodities. These funds are not regulated by the Securities and Exchange Board of India (SEBI) and have relaxed investment restrictions compared to traditional investment funds. AIFs offer investors access to a wider range of investment opportunities that are not available through traditional investment avenues.

AIFs provide flexibility & more opportunity for the Fund - Managers to invest in instruments, where the regular Mutual funds and PMS cannot invest.

Advantages of Investing in AIFs

AIFs offer several advantages to investors:

Diversification

AIFs invest in alternative assets, which offer diversification benefits to investors. Diversification reduces the overall risk of a portfolio, as it helps to spread risk across different asset classes.

Access to exclusive investment opportunities

AIFs invest in niche areas that are not easily accessible to retail investors. These exclusive opportunities can provide investors with higher returns and better risk-adjusted returns.

Active management

AIFs are managed by experienced professionals who have a deep understanding of the underlying assets. This active management helps to identify attractive investment opportunities and manage risks.

Tax benefits

AIFs offer tax benefits to investors, such as lower capital gains tax rates and the ability to claim deductions on certain investments.

Types of AIF

There are three categories of AIFs in India, as defined by SEBI:

Category I AIFs

These funds invest in start-ups, SMEs, social ventures, and infrastructure. They have a positive impact on the economy and society.

Category II AIFs

These funds invest in real estate, private equity, and debt funds. They are not covered under Category I or Category III.

Category III AIFs

These funds trade with the aim of generating short-term returns. Hedge funds and other high-risk strategies fall under this category.

Risks Involved in Investing in AIFs

Like any other investment, AIFs carry their own set of risks. AIFs invest in alternative assets, which can be illiquid and difficult to value. There is a risk of losing the entire investment, and it is important to carefully evaluate the investment strategy and risk management process of the fund before investing.

Alternative Investment Funds (AIFs) offer investors access to a wider range of investment opportunities that are not available through traditional investment avenues. They offer several advantages, including diversification, access to exclusive opportunities, active management, and tax benefits. However, like any other investment, AIFs carry their own set of risks, and it is important to carefully evaluate the investment strategy and risk management process of the fund before investing. With careful evaluation and professional guidance, AIFs can be a compelling investment choice for sophisticated investors looking to diversify their portfolios.