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AIFs and the rise of India’s HNIs

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AIFs and the rise of India’s HNIs

Stocks, bonds, and cash are what experts might call convention investment categories. On the other hand, alternative investments include private equity, managed futures, art and antiques, venture capitals, commodities, and derivative contracts. Some may even extend the definition to include real estate. 

More formally, alternative investment assets are held by institutional investors, high net worth individuals, or accredited investors. Alternate Investment Funds (AIFs) are typically categorised by high minimum investments and fee structures with lower transaction costs when compared to mutual funds and exchange-traded funds (ETFs). AIFs are relatively less liquid when compared to most conventional modes of investments. For instance, one would find it easier to sell stocks in Alphabet Inc than to sell a 19th-century painting. 

According to SEBI, as of December 30, 2021, the fund managers running AIFs raised a total ₹609,091.7 crore. This was a 38% increase from what they raised in 2020 which was ₹441,994.73 crore. Also, SEBI has set minimum investment amounts for AIF at ₹1 crore to rope in ‘sophisticated’ investors who fully understand the risks related to investing.

SEBI mandates AIFs to register themselves based on three categories:

Category I AIFs

invest mostly in Small and Medium-sized Enterprises, startups, or any sector that the government might deem to be economically and socially viable. These funds may include Angel Funds, Social Venture Funds, Infrastructure Funds, or Venture Capital Funds (VCF). While AIFs of all kinds have shown incredible growth over the past few years, VCF fund managers raised commitments worth ₹34,569.56 crore in December 2021. This was a steep rise of 29% when compared to the ₹26,791.7 crore raised during 2020.

Category II AIFs

include private equity funds or debt funds that do not involve special incentives from the government. The definition of category II AIFs may also be extended to include real estate funds and distressed assets.

Category III AIFs

include hedge funds, private investments in public equity funds or funds that
trade with the purpose of cheating short-term returns. 

AIFs are used as effective tools to diversify portfolios as the way in which they grow correlates very little to the way standard asset classes grow. This means that the value of AIFs go up or down inversely to the stock and bond market. This is why institutional funds such as pension funds allocate a small portion of their portfolios, about 10% to alternative investments lie in hedge funds.

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