If you’re searching for a path to diversify your investments and earn better returns, Alternative Investment Funds (AIFs) deserve a look. AIFs plunge money into non-mainstream assets like private equity, venture capital, hedge funds, real estate, commodities, and derivatives. They’re moderated by the Securities and Exchange Board of India (SEBI) and structured as trusts, companies, limited liability partnerships, or corporate bodies.
Why should you think about AIFs?
AIFs offer investors quite a few perks:
Bigger potential returns: By exploiting market quirks, arbitrage openings, and using leverage and derivatives, AIFs can produce higher yields than old-school investments. They can also bet on niche sectors and emerging markets with strong growth potential.
Diversification: AIFs let you branch out across various asset classes, strategies, and geographies. They can also have a low correlation with the broader market, reducing overall risk and volatility.
Pro management: AIFs are steered by seasoned fund managers with domain mastery. They also access exclusive deals and networks not available to retail investors.
Tax efficiency: Based on their category and structure, AIFs enjoy tax advantages. For example, Category I AIFs that back start-ups, SMEs, social ventures and infrastructure are income tax exempt. Category II AIFs that invest in private equity and debt are taxed at lower rates than other income. Category III AIFs that purchase listed securities get a long-term capital gains tax waiver if held for over a year.
Here’s an eye-popping stat: According to Bloomberg, the AIF industry in India has expanded more than tenfold in five years – from Rs. 20,600 crore in March 2018 to Rs. 2,23,850 crore in March 2023.
How can you invest in AIFs?
AIFs suit sophisticated, high-net-worth investors who can stomach higher risks and lock up funds for longer durations. The minimum investment is Rs 1 crore, sometimes higher. AIFs also charge elevated fees compared to mutual funds – management, performance, exit fees, etc.
Here are the steps to invest in AIFs:
Select the right AIF: They come in three categories based on investment goals, strategy, and risk appetite. Choose one aligning with your risk tolerance, return hopes, and timeframe. Consult a financial advisor or wealth manager if needed.
Complete KYC: Submit PAN card, Aadhaar card, and address/income proof and fill up the AIF application and risk questionnaire.
Transfer funds: Deposit money into the AIF’s bank account as per their schedule. You’ll receive an allotment confirmation on receiving the funds.
Track performance: Monitor via periodic reports, newsletters, and statements. Attend investor meetings and webinars. Contact the fund manager or customer support for queries.
The Bottom Line
In a nutshell, Alternative Investment Funds are a novel way for Indians to potentially earn higher, diversified, and tax-efficient returns. However, they are also risky, illiquid, pricey, and complicated. Do your homework, weigh the trade-offs, and talk to a financial pro before taking the AIF route. AIFs aren’t for everyone, but if you’re willing to take a calculated risk, they can be a rewarding bet.
