Alternative Investments are different from conventional investments like stocks, debts and securities. Alternative Investment fund is a privately pooled investment vehicle that collects money from private investors.
AIFs include private equity, venture capitals, Hedge funds, Angel funds etc. It does not come under the purview of the SEBI. NRIs, Indians, PIOs, are eligible to invest in Mutual Funds.
What are Alternate Investment Funds (AIFs)?
AIFs pool money from affluent investors Funds pooled are then invested according to the policy of AIFs. SEBIs mutual fund regulations do not control AIF. However, regulation 2(1) b of the Regulation Act, 2012 of SEBI governs the AIFs. An AIF can be established as a company, LLP, corporate body or a trust,
AIFs can be classified into three broad categories where every category has a different set of investments.
- Category I AIF
- Category II AIF
- Category III AIF
Who can invest in AIF?
- Investors who wish to have a diversified portfolio can opt for Alternate Investment Funds.
- Resident Indians, NRIs, and even foreign nationals can invest in Alternate Investment Funds
- The minimum investment in AIF is 1 crore. For directors, employees, and fund managers of AIF, the minimum investment is Rs. 25 lakhs.
- AIF may accept the following as joint investors for the purpose of investment of not less than one crore rupees: i. an investor and his/her spouse ii. An investor and his/her parent iii. an investor and his/her daughter/son
What are the Benefits of AIF Investments?
Alternate Investment funds comes with the following benefits,
High Growth – The high investment enables the manager to explore new strategies to maximize your returns. Hence, the AIF has much higher return-potential compared to other funds
Diversification – AIFs diversify your profile as much as possible that protects the investments
Low Volatility – Since AIFs are not only equity-focused compared to direct equity investments, market volatility has little impact
Category 1 AIF
Category 1 AIFs invest in start-ups or early stage ventures, Social Ventures, and infrastructure. Given below is the subcategory of Category 1 AIF,
Venture Capital Funds primarily invest in startups and other emerging businesses which displays strong growth potential. Venture capital is like a equity financing where the venture capitalists provide funds in exchange for an equity stake. VCFs generate returns upon selling their stakes. Angel Funds are a subcategory of Venture Capital funds.
Features of Venture Capital Funds,
- They come with a minimum tenure of three years. With the approval of AIF unit holders, the tenure can be increased by further two years
- Investment in one company cannot be more than 25%
- With minimum investment of 1 crore, it can be listed on stock exchanges
- VCFs cannot borrow funds to run their operations either directly or indirectly
Angel Funds raise funds from Angel Investors. Angel Investors have to fulfill the following conditions:
An Individual investor with not less than INR 2 crores as net tangible assets. The net tangible asset value is excluding the value of their residence,
- Early stage investment experience
- Experience as a serial entrepreneur
- 10 years experience in Senior Management Role
SME Funds invests in small, micro, and medium sized companies that are unlisted. The companies raise their debt through NBFC. SME Funds provide equity financing for these companies. Some of the features of SME Funds are given below,
- Minimum investment of 1 crore
- Minimum lock-in period of three years. Option to extend for three more years
- A minimum investment of75% has to be done
- SME Funds generate returns when the company reports a positive growth or gets listed
These are funds which provide funds for businesses that positively impacts growth. It also offers a reasonable return to the investors. The fund manager analyzes the impact the business creates in the society,
Features of Venture Capitalist funds,
- Minimum Investment of INR 1 Crore
- Lock-in period of three years
- A minimum Investment of 75% in business that create positive impact in lives
- In addition to funding, these funds also offer technical and operational support. Investors and the fund share the returns from Social Venture fund.
Infrastructure Bonds invest in products that develop infrastructure products. It raises capital from private investors. Some of the examples of infrastructure projects include railways, roadways, waterways, and renewable,
- Close-ended funds with a minimum lock-in period of three years and option to extend upto 2 years
- Minimum tradable lot of INR 1 crore it can be listed on stock exchanges
- Investors can liquidate within one year after fund expiry
- Investment in one company cannot be more than 25%
Category II AIF
Category II AIF Funds are the funds that do not fall under Category I and III and is used for operational services on a day to day basis. Government does not give any incentive for investment in these funds
Private Equity funds are those funds that invest in unlisted private companies. Since private companies cannot raise funds through equity or debt instruments, they usually go for this private equity for funding their operations. As they cover the operational costs, these funds take ownership of the company. Usually, the lock-in period ranges between four to seven years,
Debt Funds invest in debt securities. They mainly invest in listed or unlisted companies as per the objective of the fund. They usually invest in companies that have good growth potential.
As the name indicates, Funds of Funds invest in other AIFs. They do not have a own investment portfolio. Moreover, they do not issue units to the public,
Investment Restrictions for Category II AIFs
- Minimum Lock-in period of three years
- Minimum corpus under each scheme is 20 crores
- Minimum investment from an investor is 1 crore
- It can invest only in units of other AIFs or unlisted companies
- They can engage in hedging
- These funds are exempted from SEBI insider trading regulations. However, it is valid only for investments in SME exchange.
- These funds can invest 25% of the funds on overseas investee with a maximum cap of 500 million
- They can accept joint investment but it cannot be less than INR 1 crore
Category III AIF
Category III AIF use diverse strategies and leverage by investing in listed and unlisted companies. They use strategies like arbitrage, derivative trading, and margin trading. It can be both open-ended and close-ended funds. They are less regulated than conventional investments and do not need to publish their information periodically. Government does not provide any incentive for these funds,
Hedge funds invest in domestic and international markets by pooling in funds from private investors. The fund managers use a variety of strategies including leveraging of non-traditional assets to earn maximized returns.
They are considered as risky and usually require a high investment. It is the reason as to why only wealthy investors invest in. Generally, the fund management team charges a fee of 2% of investment and take up to 20% profit share as fees.
Private Investment in the Public equity is buying of share of publicly traded company at a value below the current market value. The purpose of PIPE is for the issuer of stock to raise capital for the publicly traded company.