Speak to Dhankibaat expert
 

Alternate Investment Funds decoded

In this episode of Dhan ki Baat, Jayanth Ranganathan, Executive Vice President, IIFL Securities, explains the process of investing in Alternate Investment Funds.

3692 views  10 Apr 2018

All About Alternative Investment Funds

An Alternative Investment Fund (AIF) is a privately pooled investment vehicle that can take the form of a company, a trust, body corporate or a Limited Liability Partnership. In India, AIFs are defined under the Regulation 2(1)(b) of Securities Exchange Board of India (Alternative Investment Fund) Regulations 2012 and are not regulated by any regulators like IRDA, PFRDA or RBI.

Features of AIFs:

  • Except for Angel Funds, a minimum of Rs1cr per investor is required as an investment and a minimum of 1,000 sophisticated investors are required.
  • In Angel Fund AIFs, minimum 49 investors are required with an investment of Rs25 lakh each.
  • The members in an AIF are not legally allowed to invite people at large to subscribe to the fund.

Benefits of AIFs

  • Portfolio Diversification
  • Option to invest in non-traditional asset classes
  • Opportunity to invest in a particular strategy
  • Access to wider investment horizon
  • Taxation: Category I and II: Investor level
  • Taxation: Category III: Fund level

Categories of AIF

Alternative Investment Funds are broadly divided into three categories:

Category

The Category I funds invest in either/or:

  • Start-ups
  • SMEs (Small or medium enterprises)
  • Social Ventures
  • Infrastructure
  • Any other socially or economically desirable sector

These funds are not allowed to engage in any leverage except for meeting funding requirements up to 30 days, on not more than 4 times in a financial year with a corpus less than 10%. The tenure of these funds can be between 3 to 10 years. Some examples of funds, which come
under this category are Venture Capital Funds (Angel Funds), SME Funds, Social Venture Funds, Infrastructure Funds. Under the Category I AIF, the fund drawdown happens after every 4-5 years.

Category II

The AIFs that do not fall under Category I and Category III fall under this category. For category II AIFs, no specific incentives or concession is given by the government or any other regulator. The funds are prohibited from raising debt other than to meet day to day operational requirements. The tenure for funds of this category can be between 3 to 10 years. Examples of AIFs belonging to Category II are Real Estate Funds, Private Equity Funds and Funds for Distressed Assets. The fund drawdown happens in 4-5 years.

Category II

AIFs of Category III make use of diverse or complex trading strategies. This category is primarily for Hedge Funds and can employ leverage through an investment in listed/unlisted derivatives. The funds in this category are traded to make short-term returns with no concession or incentive provided by the government or regulator. The tenure for these funds is minimum 3 years.

Eligibility Criteria

  • Investors can be Indian, NRI or foreign nationals.
  • Minimum corpus should be Rs20cr for each scheme and Rs10cr for Angel Funds.
  • Minimum investment by each investor should be Rs1cr or Rs25 lakh (in case of employees/director/fund manager of AIF).
  • Maximum number of investors in each scheme can be 1,000, but 49 in case of Angel Funds.
  • Category I & II AIF can be close-ended only. With minimum 3 years, Category III can be either open or close-ended.
  • The sponsor shall have a continuing interest in the respective AIF, of not less than 2.5% of the corpus (AIF I & II) and 5% of corpus in AIF III or Rs5cr (for each scheme), whichever is lower.

Recent News related to Alternative Investment Funds

  • AIF registered in India with SEBI have increased to 366 from 92 in 2015-16.
  • Total investment record jumped to Rs43,500cr from Rs11,250cr in September 2015.
  • The landscape of Indian investors is changing fast with a huge spike in wealthy investors and family office.
  • Buoyancy in listed stocks and unlisted space are providing impetus to the AIF industry.
  • Buoyancy in listed stocks and unlisted space are providing impetus to the AIF industry.

While investing in AIFs, do understand that you will have to bear risks like Market Risk and Liquidity Risks.