fbpx

What is Alternative Investment Funds (AIF)?

  • Home
  • Alternative Investment Funds ( AIF )
AIF & PMS Chatbot

Hello there!

Welcome to AIF & PMS Experts India Pvt. Ltd.

An Alternative Investment Fund, or AIF, is a confidentially pooled investment vehicle developed or incorporated in India that collects assets from expert investors, whether Indian or global, for investing in line with a defined investment policy for the welfare of its investors. AIFs can be formed or incorporated as a corporation, trust, or other legal entity (including limited liability partnerships). The SEBI (Mutual Funds) Laws of 1996, the SEBI (Collective Investment Schemes) Laws of 1999, or any other Board regulations governing fund management do not apply to AIF.

pms

Everything to Know about Alternative Investment Fund (AIF)

The term “alternative investment fund”, refers to the collection of pooled investment funds that infuse in venture capital, private equity, hedge funds, managed futures, and other types of investments. We can also say that an AIF is a type of investment distinct from traditional investment options such as stocks, bonds, and other debt securities.

The Securities and Exchange Board of India’s Regulation Act, 2012 defines an Alternative Investment Fund (SEBI). AIFs can form as a corporation, a trust, or a Limited Liability Partnership (LLP).

Generally, high-net-worth people and organizations engage in Alternative Commitment Funds since, unlike Mutual Funds, they need a large initial investment.

 

Types of Alternative Investment Fund (AIF)

This category includes funds that invest in start-ups, small and medium-sized firms (SMEs), and new businesses with strong growth potential and is socially and economically viable. Because these ideas have various effects on the economy. With the terms of job and growth generation, the government encourages with the plan of investment. These funds have proved a lifeline for already-successful firms in need of funding. Take a look at the many kinds of AIFs.

 

  1. Venture Capital Fund (VCF)

Venture Capital Funds invest in high-growth start-ups that are experiencing cash constraints in the early stages of their business and require capital to develop or expand their operations. Because it is difficult for new firms and entrepreneurs to get funds through the financial markets, Venture Capital Funds have become the most popular option for their funding needs.

They invest in a variety of businesses based on their company characteristics, asset size, and product development stage. Venture capital funds, unlike mutual funds and hedge funds, concentrate on early-stage investments. Each investor receives a proportional share in the firm that the VCF has invested in, based on their investment.

 

  1. Infrastructure Fund (IF)

The fund invests in public assets like road and rail infrastructure, airports, and communication assets, among other things. Investors that are positive about future infrastructure growth can participate in the fund since the infrastructure industry has high entry barriers and little competition.

Infrastructure Fund investors might expect a mix of capital growth and dividend income as a result of their investment. When an Infrastructure Fund invests in initiatives that are socially acceptable and practical, the government may offer tax incentives.

 

  1. Angel Fund

This is a sort of Venture Capital fund in which fund managers combine money from a number of “angel” investors to invest in early-stage firms. Investors receive dividends when new enterprises become profitable.

Units are distributed to angel investors in the case of Angel Funds. An “angel investor” is a person who wishes to invest in an angel fund and adds business management knowledge to the table, therefore assisting the company in its growth. Because of their growing uncertainties, these investors usually invest in companies that aren’t sponsored by conventional venture capital funds.

 

  1. Social Venture Fund

Socially responsible investment has spawned the Social Venture Fund (SVF), which invests in firms with a strong social consciousness and a desire to have a positive impact on society. These businesses are focused on producing money while also addressing environmental and social challenges. Despite the fact that it is a philanthropic investment, one may expect a return because the companies will still generate money.

 

  1. Private Equity (PE) Fund

PE funds invest in private firms that aren’t publicly traded with stakeholders. Because the unlisted and unauthorized private enterprises are unable to raise cash with PE funds for help.

Furthermore, these organizations provide their clients with a diverse portfolio of shares, lowering the investor’s risk. A defined investment horizon of 4 to 7 years is usual for a PE fund. The company hopes to be able to exit the investment with a decent profit after seven years.

 

Benefits of Investing in AIFs

People constantly evaluate the benefits of AIFs and other funds when investing in a fund. Learn the benefits of AIFs: 

 

  1. Uncorrelated with Stock Market

Every investor who has the stock market for a long time has certainly had some large successes and some significant losses. Anyone who is nearing retirement or has already retired has felt the pain of watching their portfolio decline, often dramatically. One of the key reasons investors seek alternative investments is to diversify their portfolios.

Many investors are discovered with private alternatives as a method to diversify their portfolios and hedge against volatility. As a result, if the stock market falls sharply, they will have a hedge of protection, and their whole investment portfolio will be unaffected. Even in a stable economy, the stock market is notoriously unstable, and alternatives are mostly immune to the public markets’ volatility.

 

  1. Look at the Direct Ownership

What you’re getting in most public investments is a paper asset — the discounted value of future projected earnings. You don’t actually have any possessions. Even after investment in REIT, you’re still a long way from having your name on the real estate property’s deed.

When you purchase excellent wine or art, you are purchasing the bottles of wine or the oil painting directly. If you purchase a rental property, you own it outright. You have a lien on a property if you acquire a mortgage note.

 

  1. Know about the Tax Benefits

Alternative investments might potentially offer significant tax advantages. Because of the structure of many alternative investments, you get to keep more of your profit. You should be a part of the fund or syndicate in many private alternative investments, and the tax benefits are passed on to you directly.

Pass-through depreciation and long-term capital gains treatment are the two most major tax benefits. Depreciation expenditure (a non-cash expense) is deducted from net income by many real estate funds or syndications, lowering taxable income. Depreciation/depletion tax treatment for oil and gas assets is quite advantageous. 

 

  1. Identify the Passive Investments

Most busy investors value their time highly, and actively maintaining an asset or portfolio takes a significant amount of effort. Let’s look at real estate as an example, because that’s where most people assume they should start investing. They rapidly discover how much effort is necessary and how steep the learning curve is after becoming enthusiastic about the thought of renting a single-family house or even a modest multifamily apartment. There is a limitless supply of instructors marketing their “5 Step Plan to Success,” but recruiting co-investors, securing money, structuring the deal, discovering and appraising properties, and so on are all difficult tasks. Many investors quit up at this stage and think that there are no further possibilities.

 

Bottom Line

After going through the factors and elements of AIF, it will help you understand the benefits of investment and planning on the fund.

Categories of AIF

Category I

AIFs that invest in start-ups or social enterprise funds, infrastructure funds, SME funds, and so on are classified as Category I AIF. For the government or regulators, they are frequently deemed socially or economically viable.

Category II

Funds that do not use leverage or borrow for any reason other than to cover operational needs that do not fall under Categories I or III. This is where Private Equity Funds usually fall.

Category III

Funds that engage in a variety of or complex trading techniques, such as investing in listed or unlisted derivatives, fall into Category III. Hedge funds are typically included in this category. Open-ended funds are classified as Category III AIFs whereas closed-ended funds are classified as Category I and II AIFs.

Benefits of AIF

Customizable

The structure of an AIF can be tailored to fit a specific investing strategy, whether it's exposure to a single sector or diversification across asset classes.

Raising Resources Flexibility

The AIF may raise funds from any investor, whether Indian, foreign, or non-resident Indian (NRI)

Have a Large Corpus

Because AIFs act like mutual funds, they pool capital to create a larger corpus.
The collected capital might be used to meet certain investment goals

FAQ

What are AIF funds?

Any fund established or incorporated in India that is a privately pooled investment vehicle that collects funds from sophisticated investors, whether Indian or foreign, for investment in accordance with a defined investment policy for the benefit of its investors is referred to as an Alternative Investment Fund (AIF).

Who can invest in alternative investment funds?

Investors that desire to diversify might pick Alternative Investment Funds to invest. All Indians, including NRIs, PIOs, and OCIs, are eligible to invest in AIFs. They must, however, fulfill the qualifying requirements, which include a minimum capital of Rs20 crore for each programme and Rs10 crore for Angel Funds. Each investor shall make a minimum investment of Rs1 crore or Rs25 lakh (in the case of AIF employees, directors, and fund managers).

How can I invest in AIF in India?

If you are a risk-taking investor who wants to diversify his or her risk, you may invest in SEBI-registered Alternative Investment Funds as well as join us and we will assist you through the whole process

Can alternative investment funds (AIF) give loans?

Alternative Investment Fund is a privately pooled investment vehicle in which the funds supplied by investors are not used to make loans.

What is not included in Alternative Investment Fund?

An alternative investment is a financial asset that does not fall into one of the conventional (stocks, bonds, and cash) investment categories.

What is the difference between mutual fund and alternative investment fund?

A mutual fund is a pooled investment entity, with numerous participants raising cash. Mutual investments include stock, bonds and financial-market instruments, whereas alternative investment funds (AIF) are distinct from traditional standard investments such as stocks, debt securities, etc. Investments in a wide range of assets.

Are alternative investments high risk?

They are also more volatile than traditional assets, like equities, bonds and reciprocal funds. Most of them are relatively not liquid and therefore hard to sell fast. Most are complicated and frequently involve risks that are larger than typical investments.

Are alternative investments liquid?

Aside from standard stocks and bonds, the phrase “alternative investment” refers to a wide range of assets. Many are not publicly priced or traded, making them difficult to trade. That is why they are said to as lliquid.

What are 4 types of investments?

4 distinct types of investment are split into two sub-categories, which are:

  1. Growth investments: Long-term investments in shares or property.
  2. Defensive investments: Consistently generated income such as cash and bonds.

What is the minimum investment in AIF?

Angel funds require a minimum investment of INR 25 lakhs per investor. If the AIF is not an angel fund, the minimum amount of investment per investor is INR 1 crore.

What does Alternative Investment Funds stand for?

Any fund established or incorporated in India that is a privately pooled investment vehicle that collects funds from sophisticated investors, whether Indian or foreign, for investing in accordance with a defined investment policy for the benefit of its investors is referred to as an Alternative Investment Fund (AIF).

What is the enrolment charge to be paid by an Alternative Investment Fund?

The registration fee is set by SEBI Regulations and must be paid by the applicant. The following is the AIF registration fee schedule

  • The registration fee for Category I Alternative Investment Fund is Rs. 5, 00,000.
  • The registration fee for the Category II Alternative Investment Fund is Rs. 10, 00,000.
  • The registration fee for Category III Alternative Investment Fund is Rs. 15, 00,000.

What is the reason for investment in an AIF?

High-net-worth individuals (HNIs) wishing to diversify their investment portfolio might consider AIFs, which provide a high return potential while also carrying a high level of risk. AIFs invest in securities other than stocks, bonds, mutual funds, and other traditional investments, allowing investors to diversify their portfolios and have access to higher-yielding assets.

Who can invest in AIF?

Any competent investor, whether Indian, foreign, or non-resident Indian, can invest in an AIF if they have the necessary capital and are ready to wager on unlisted and illiquid stocks.

What is the minimum investment required for investing in an AIF?

Except for angel funds, all types of AIFs in India need a minimum investment of Rs. 1 crore. The sum for the angel fund is Rs. 25 lakh.

What is the corpus of the Alternative Investment Fund (AIF)?

The term “corpus” refers to the entire amount of money that investors commit to an AIF in the form of a written contract or another similar instrument.

Is there any limit of investors who can be a part of the AIF scheme?

AIFs in all categories (excluding angel funds) can have up to 1,000 investors. A maximum of 49 angel investors can be found in an angel fund. Furthermore, AIF is unable to make a public call for investors to subscribe to its units and can only collect funds through private memorandum issuance and other ways.