Alternative Investment Funds (AIF)

Alternative Investment Funds AIF differ from regular conventional investments (asset classes) like stocks, debt securities etc. Alternative Investment Fund is a privately pooled investment vehicle that collects money from sophisticated private investors.

AIFs include private equity, venture capital, hedge fund, and angel fund etc. Also, AIFs don’t come under the purview of Securities and Exchange Board of India SEBI mutual fund regulations. Investors who wish to diversify can choose Alternative Investment Funds to invest. All Indians, including NRIs, PIOs, and OCIs, are eligible to invest in AIFs. However, they will have to meet the eligibility criteria.

What are Alternative Investment Funds (AIFs)?

Alternative Investment Funds (AIF) pool money from sophisticated private investors. Funds collected are invested according to the investment policy of the AIF. Securities and Exchange Board of India’s mutual fund regulations doesn’t govern AIFs. However, AIF in India has its regulation, Regulation 2 (1) (b) of the Regulation Act, 2012 of SEBI. An AIF in India can be established as a company, Limited Liability Partnership (LLP), corporate body, or trust.

AIFs invest in investments that are not traditional (for example, equities or fixed income). Securities and Exchange Board of India classifies AIFs under three broad categories. Namely, Category I AIF, Category I AIF and Category III AIF. Each of the categories has different investments as per the broad definition of the category. Some of them are private equity, venture capital, hedge fund, and angel fund etc.

The minimum investments and fees for AIFs are higher than conventional investments. It is difficult to value an AIF as the asset classes that they invest in are pretty rare. AIFs are illiquid as these investments are open only to limited investors. The transaction costs for AIFs are lower than traditional investments as the turnover is lower. AIFs don’t share any information relating to the fund publicly. Also, AIFs have less opportunity to advertise to potential investors.

Who is Eligible to Invest in AIF?

Investors who wish to diversify can choose Alternative Investment Funds to invest. However, they have to be eligible for the same.

Resident Indian individuals, Non-Resident Indians (NRIs) and foreign nationals can invest in alternative investment funds.

Also, there is a cap on investment by each investor. The minimum investment permitted is INR 1 crore. For angel investors, the minimum investment is INR 25 lakhs. However, for directors, employees and fund managers of the AIF, the minimum amount is INR 25 lakhs.

What are the Benefits of AIF Investments?

Following are the benefits of investing in AIFs:

• High Growth: The high corpus amount gives the fund manager the flexibility to explore new strategies to maximize returns. Thus, the return potential of AIFs is higher than other investments.
• Diversification:AIFs don’t invest only in one asset. They have a well-diversified portfolio that protects the investments even during high market volatility.
• Low Volatility:AIFs are not highly volatile. Since they have a well-diversified portfolio that isn’t only equity-focused. Thus, when compared to pure equity investments, AIFs have low volatility.

SEBI AIF Regulations

Following are the regulations laid down by SEBI for AIF over the years:

• Venture capital must allocate at least 75% of its asset to equity-linked instruments and unlisted equity shares. Furthermore, they must invest in companies that are undertaken by venture capital or SME-listed companies.
• Minimum investment amount of INR 25 lakhs is not applicable for accredited investors when investing in social venture funds.
• Category 3 AIFs, i.e., private equity and hedge funds, cannot invest more than 10% of their capital in a firm.

AIF Taxation Rules

Alternative Investment Funds are privately pooled investment vehicles. They collect money from sophisticated private investors. Following are the taxation rules of AIFs for each category.

Category I and Category II are pass-through vehicles. The fund doesn’t have to pay any tax on its earnings. However, the investors have to pay the tax at their respective tax slabs. If the fund has any capital gains on stocks, then the investors have to pay 15% or 10% depending on the holding period.

Category III AIFs are taxable at the highest income tax slab level (42.7%) at the fund level. The returns given to investors are after deducting the tax.

Why Should You Invest in an AIF?

Alternative Investment Funds AIF pool money from sophisticated private investors. Funds collected are invested according to the investment policy of the AIF. AIFs invest in investments that are not traditional (for example, equities or fixed income). Securities and Exchange Board of India classifies AIFs under three broad categories. Namely, Category I AIF, Category I AIF and Category III AIF. Each of the categories has different investments as per the broad definition of the category. Some of them are private equity, venture capital, hedge fund, and angel fund etc.

Following are the reasons why one should invest in AIF:

• Diversification: AIF is a good option for portfolio diversification. The performance of AIFs does not depend on the performance of the stock market. With AIS, the investor’s portfolio becomes more resilient and less volatile to market fluctuations.
• Volatility: Most alternative investments are comparatively less volatile than stocks. Hence these are a good choice of investment for those who are looking for portfolio stability.
• Better Returns: Alternative investments offer significant returns in comparison to other traditional investments.
• Passive Income: AIFs can be a good source of passive income for investors.

Who is the Sponsor of the AIF?

Sponsor(s) is a person(s) who has established the AIF. In the case of a company, a promoter is the sponsor. And in case of a Limited Liability Partnership, a designated partner is the sponsor. To ensure the good interest of the sponsor or manager is aligned with that of the investors, few regulations have been set up.

The sponsor/manager will have a certain continuing interest in the AIF. This will not be in the form of a fee waiver. For Category I and II, the sponsor/manager will contribute an amount not less than 2.5% of the corpus or INR 5 Cr, whichever is lesser. For Category III, the contribution will be 5% of the corpus or INR 10 Cr, whichever is lower. Also, for angel investors, this amount will not be less than 2.5% of the corpus or INR 50 lakhs, whichever is lesser.