Venture, Angel, Infrastructure, and Social Funds
As the global economy recovered from the COVID-19 pandemic, investment in Indian venture capitals and private equities too reached a record high, touching $77 billion in 2021. This was a significant 62% higher than 2020’s $47.5 billion. And as demand for digitising grew India’s start-up ecosystem recorded investments of nearly US$36 billion.
Set against the robust context of a rapidly growing economy, there has been a rapid rise in Alternative Investment Funds (AIFs). These funds stand in contrast to more traditional investment tools like bonds, stocks, and real estate. These are privately pooled investment vehicles that collect funds from sophisticated investors, both domestic and foreign. The investments occur based on a predefined investment policy for the benefit of investors.
AIFs are divided into three categories based on the kind of funds the AIF is focused on. For instance, category I funds primarily invest in startups and Small and Medium-sized Enterprises. They typically look for relatively new businesses with high growth potential with socio-economic viability. The government also promotes and incentivises investments in projects that might positively impact social and economic development within the country and also aid in job creation.
Category I AIFs include the following funds
Social Venture Funds
These funds are driven by the mission of investing in a social responsible manner with a strong conscience with the mission to create real societal change.
Venture Capital Fund (VCF)
Startups with enormous growth potential but facing crunches in cash flows and investment in their early stages need funding to further scale up their business. And because it might be hard for a first-time entrepreneur to raise huge amounts, VCFs could be the go-to way to raise finances.
VCFs pool in money from investors who wish to make equity investments in ventures. Then the fund invests in several startups with diversified business profiles, product development phases, asset sizes, etc. But VCFs must not be mistaken for hedge or mutual funds as they mostly channel their funds towards early state investments. Also, each investor is entitled to the share of the business the VCF has invested in, in a manner that is proportional to the investment made by the investor. VFCs tend to attract investors with high net worths, especially the ones seeking high-risk-high return investment options.
Infrastructure Fund (IF)
As the name suggests, these funds are dedicated towards developing public assets such as airports, communication infrastructure, railways, and roadways. The returns from these funds are usually a combination of dividend income and capital growth. The government may allow tax exemptions for Infrastructure investments
Angel Funds are basically Venture Capital Fund where fund managers pool investments from a number of angel investors and invest it in building startups. And when the business turns profitable, investors start receiving their dividends. The angel investor may also bring his/her business and managerial experience to help the startup gain momentum and invest in organisations that have not yet received funding from established venture capital firms due to growth uncertainty.
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