Although equities, bonds, and fixed deposits have historically been the mainstay of wealth building, a new trend among astute investors is emerging: Alternate Investment Funds (AIFs). These high-risk, high-reward financial instruments offer the potential for significant returns.
Understanding Alternate Investment Funds (AIFs)
Fundamentally, AIFs are pools of investments that direct money into non-traditional asset classes like futures, venture capital, private equity, and hedge funds.
Since their introduction in 2012 by SEBI, AIFs have grown in popularity and drawn many investors looking for alternatives to traditional market offerings.
Why Are AIFs Gaining Popularity?
AIFs offer you an access to a broad spectrum of assets often not directly correlated with the stock market. In addition to providing potential for better returns than more conventional investing options, this diversity acts as a hedge against market volatility.
AIFs allow you to participate in exculsive opportunities such as investments in early-stage companies, infrastructure projects, and socially responsible ventures.
Growth of the AIF Industry in India
By December 2020, the total investments raised by AIFs had reached approximately Rs. 2.13 lakh crore, reflecting a compound annual growth rate (CAGR) of 76.6% between 2014 and 2020. During this period, commitments for investments surged to Rs. 4.42 lakh crore (68.0% CAGR), and actual investments in alternative assets by AIFs reached Rs. 1.85 lakh crore (78.4% CAGR). This highlights the increasing confidence and interest in AIFs among investors.
Categories of Alternate Investment Funds (AIFs)
Category I AIFs
Small and medium-sized firms (SMEs), start-ups, and other companies with significant development potential are the main targets. Sub-categories comprise:
- Venture Capital Funds (VCFs): VCFs pool money from various investors to support start-ups with high valuations but temporary funding challenges.
- Infrastructure Funds (IFs): invest in public infrastructure projects such as roads, bridges, railways, and dams. Returns are typically generated through dividends and capital gains.
- Social Venture Funds (SVFs): invest in companies that strongly focus on social and environmental issues, aiming to create positive social impact.
- A subset of VCFs, angel funds pool capital from investors (angel investors) to support early-stage businesses.
Category II AIFs
Category II AIFs include a diverse range of funds, such as:
- Private Equity (PE) funds invest in unlisted private companies, offering a way to diversify your portfolios with potentially high-risk, high-reward investments.
- Fund of Funds: This type of fund invests in other AIFs, allowing you to gain exposure to multiple strategies and asset classes within a single investment.
- Debt Funds: These funds focus on investing in debt instruments issued by listed and unlisted companies, providing a fixed income stream with relatively lower risk.
Category III AIFs
Category III AIFs are designed for investors seeking exposure to public equities and hedge funds. Key sub-categories include:
- (PIPE) Funds, also known as Private Investment in Public Equity, invest in publicly traded companies, often acquiring significant stakes to influence management decisions.
- Hedge funds collect capital from individual and institutional investors and employ various strategies to generate high returns.
