What is Alternative Investment Fund (AIF) ?

Many investors, particularly HNIs, seek other investment opportunities besides stocks and bonds. An Alternative Investment Fund (AIF) is one choice they should consider. In comparison to conventional investments, these investment options may offer better returns. They pose a greater risk than equities (generally speaking). The funds are aimed at HNIs, but ordinary midsize investors are also anticipated to have access to them. The Indian AIF market was worth Rs 6.4 lakh crore as of March 31, 2022, a remarkable 7X increase over the previous five years. It demonstrates that investors have a lot of interest in India. What is AIF? The phrase "Alternative Investment Fund" describes a group of pooled investment funds that invest in venture capital, private equity, hedge funds, and other investments. A firm or a Limited Liability Partnership (LLP) can set up an Alternative Investment Fund. According to the Securities and Exchange Board of India (SEBI), AIF is divided into three categories. Here are those groups: Category 1: Under this heading, the AIF may make investments in SMEs, startups, and fresh, commercially viable businesses with significant room for expansion. The various funds under this group consist of the following. Infrastructure funds invest in businesses doing infrastructural projects, such as building railroads and airports. Venture Capital Funds (VCF): The fund puts money into promising, capital-intensive startup companies. Angel funds: They invest in cutting-edge startups that do not already have funding from VCF. Each angel investor contributes at least Rs. 25 lahks. The social venture fund invests in companies that engage in charitable endeavours. Through investing, they hope to influence society. Category 2: Funds only use leverage to meet their operational needs, which are unmet by categories 1 and 3. The following funds fall into this category: Debt funds, these funds invest in the debt securities of unlisted businesses that they believe have strong development potential and adhere to sound governance practises. In this scenario, the funds are invested in additional alternative investment funds. Private equity funds: By issuing debt and equity instruments, private equity funds invest in unlisted businesses that have trouble raising cash. Funds in Category 3 use a variety of sophisticated trading strategies, such as buying listed or unlisted derivatives. The following funds fall into this category: PEFs (Private Equity Funds): These funds invest in publicly traded companies by purchasing their stock at a discount. Hedge funds assemble cash from investors and businesses to invest in the domestic and international debt and stock markets. These schemes employ an aggressive investment strategy to give their investors a better return. Who may invest in AIF? AIFs are open to investments from Indian residents, NRIs, and foreigners. For investors, the minimum investment cap is Rs. 1 crore. The minimum threshold for directors, employees, and fund managers is Rs. 25 lahks. The typical lock-in period for AIFs is three years. A maximum of 1000 investors may participate in each plan. The maximum number of investors for angel funds is 49. Why should I invest in AIFs? - Diversification: For every investor, diversification is essential. For HNIs with huge ticket sizes, it is even more essential. Investors can diversify their holdings using AIF. When the market is volatile, they serve as a cushion. - High returns: Compared to alternative options, AIFs can give investors better returns. The enormous amount that has been pooled enables fund managers to plan adaptable strategies for maximising returns. - Low volatility: The stock market is not connected to AIFs. As a result, these funds have lower volatility when compared to typical equity investments (although risks are still involved). The tax advantages of AIFs Alternative investments provide considerable tax benefits. You keep more of the profit because of how alternative funds are set up. The AIF taxation will vary and depend on the type. For categories 1 and 2, there is a pass-through status. It indicates that the investor, not the fund company, will be responsible for paying taxes on the revenue (or loss) generated by the fund. In brief, you must pay capital gains tax on profits earned under these two headings. Different rates are payable for Category 3, depending on the nature of the profit. Conclusion For investors seeking high returns with a certain degree of risk, AIFs are an intriguing choice. Investors must nonetheless properly comprehend the fund and be aware of the risk before making an AIF investment nonetheless properly comprehend the fund and be aware of the risk before making an AIF investment. Since it is anticipated that AIFs will open to retail investors in the upcoming years, small retail investors can continue to learn about this alternative.