What are Alternative Investment Funds (AIF)?

What are AIFs?

Alternative Investment Funds or AIFs are unique investment vehicles that are privately pooled and invested in alternative asset classes such as venture capital, private equity, hedge funds, commodities, real estate, and derivatives and are distinctly different from other investment options like mutual funds, fixed deposits, or equities etc. Alternative Investment Funds may invest in equity shares of unlisted companies. while alternative funds may employ complex trading strategies to generate profits in diverse market conditions.

These Alternative strategies funds are regulated by the SEBI (Securities and Exchange Board of India). As per the SEBI (Alternative Investment Funds) Regulations, 2012, an AIF can be set up as a trust, a company, a limited liability partnership, or a corporate body. SEBI has many Alternative Funds registered in the form of trusts.

There are three types of Alternative Asset Funds:-

1. Category I: These funds invest in the early-stage unlisted companies in the form of equity or debt (venture capital). These alternative asset funds can also invest in infrastructure-based projects or social ventures.
2. Category II: These types of funds invest in equity or debt of unlisted companies that are in mid or late stage of growth and are known as private equity or pre-IPO respectively.
3. Category III:This category of fundsinvests in the shares of listed companies. These alternative strategy funds can be for any period – long only or a combination of long and short.

Who can invest in AIFs?

Resident Indians, NRIs and foreign nationals can invest in AIF. Generally, alternative funds are for those who can afford higher investment amount, the minimum investment size for investors (excluding accredited investors as per SEBI’s eligibility criteria for such investors, refer to SEBI’s master circular on AIF dated 7th May 2024, Annexure 8, Clause 1) being Rs. 1 crore. Also, the growth of alternative investments may need long investment tenure. The maximum number of investors in an AIF scheme is capped at 1,000. Alternative investment funds are suitable for sophisticated investors with higher risk-takingcapacities.

How will the Indian AIF be placed in coming years?

The alternative asset funds industry in India has grown over the past 5 years.As per SEBI (Securities and Exchange Board) data, AIF commitments raised till 31st March 2024 was over Rs 11.3 lakh crores. (see the table below)

(Amounts in Rs. Crores)

Source: SEBI, as on 31st March 2024

According to “The Wealth Report 2023” by Knight Frank, India will see a 58% rise in UHNIs over the next five years. GIFT City aims to open more investment avenues for Indian investors through AIFs and also attract foreign capital. With India emerging as one of the most favourable markets for global investors, the alternative funds industry has potential to reach greater heights in coming years.

Your financial advisor will guide you on whether the alternative funds are suited for you and also answer any questions regarding how to invest in an Alternative investment fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.