What is an Alternative Investment Fund?

Alternative Investment Funds (or AIFs) are privately pooled investment vehicles that collect money from sophisticated investors, either Indian or Foreign or both to invest in venture capital, private equity, infrastructure, hedge funds, among others. 

Unlike traditional investment funds that invest in listed equity securities or debt securities which are liquid investments, the asset classes that AIFs invest in are primarily private, unlisted and illiquid securities. They were introduced by the SEBI in 2012, for deep pocket mature investors who are have a high risk and high return appetite. 

What are the features of an Alternative Investment Fund?

Some of the features of an Alternative Investment Fund are: 

An investor has to invest a minimum of INR 1 crore in an AIFIt is illiquid investment as AIFs usually invest in assets which are not listed on the exchanges and the investment tenure is longAn AIF cannot have more than 1,000 investors; an Angel Fund can have upto a maximum of 49 investorsIt doesn’t come under the purview of SEBI’s mutual fund regulationsHave a lock in period of 3 yearsInformation relating to the fund or its performance is not required to be made public 

What are the types of Alternative Investment Funds?

As per the SEBI, Alternative Investment Funds are classified into 3 broad categories as below: 

Category I AIFs:

These AIFs invests in new and upcoming businesses that have strong growth potential and are sub categorized into: Venture Capital Funds, Angel Funds, SME Funds, Social Venture Funds and Infrastructure Funds.

Government encourages investments in these funds as they positively impact country’s economic development by creating jobs and contributing high output. 

Category II AIFs:

These AIFs are those which do not fall in Category I and III and do not undertake any leverage or borrowing other than to meet day-to-day operational requirements. They include Private Equity Funds, Debt Funds, Funds for Distressed Assets, among others 

Category III AIFs:

These AIFs employ complex and diverse trading strategies. They are allowed to take on leverage to invest in listed and unlisted derivatives. It includes Hedge Funds, PIPE Funds, among others 

How are Alternative Investment Funds taxed?

Category I and Category II AIFs do not have to pay any tax on their earnings. However, the investors in these funds need to pay tax as per their tax slab rates applicable to them. 

Category III AIFs are taxable at the highest tax slab rate at the fund level. The returns are then given to investors after deducting the tax. 

Why should HNI’s invest in Alternative Investment Funds?

Few benefits of Alternative Investment Funds are: 

They give exposure to non-traditional trading strategies and asset classes which are not permitted to conventional investment products like mutual funds due to regulatory restrictionsHelp investors to reduce the risk associated with market volatility as their performance is not dependent on stock market ups and downsThey offer an opportunity to earn superior returns as compared to traditional investments assets as they come with the high risk-high return rationale 

If you wish to get guidance on investing in AIFs in India and exponentially grow your wealth, get in touch with Prabhudas Lilladher. They are one of India’s leading financial advisors!

To learn more, refer to - https://www.plindia.com/alternativeinvestmentfunds.aspx

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