Alternative Investment Funds

Alternative alternative Fund is a special investment category that differs from conventional investment instruments.

AIF refers to any privately pooled investment fund, (whether from Indian or foreign sources), in the form of a trust or a company or a body corporate or a Limited Liability Partnership (LLP). Hence, in India, AIFs are private funds which are otherwise not coming under the jurisdiction of any regulatory agency in India. Types of AIFs in India

SEBI has categorized Alternative Investment Funds into 3 categories:

• Category 1: These funds invest in SMEs, start-ups, and new economically viable businesses with high growth potential.

1. Venture Capital Fund (VCF): New-age entrepreneurial firms that require large financing during their initial days can approach VCF. VCF can help them in overcoming the financial crunch. These funds invest in start-ups with high growth prospects. HNIs investing in VCFs adopt a high-risk, high-return strategy while allocating their resources.
2. Angel Funds: These invest in budding start-ups and are called angel investors. They bring early business management experience with them. These funds invest in those start-ups that do not receive funding from VCF. The minimum investment by each angel investor is Rs 25 lakh.
3. Infrastructure Funds: This fund invests in infrastructure companies, i.e., those involved in railway construction, port construction, etc. Investors who are bullish on infrastructure development invest their money in these funds. 
4. Social Venture Funds: Funds investing in a socially responsible business are social venture funds. They are a kind of philanthropic investment but have a scope of generating decent returns for investors. 

• Category 2 : Funds that don’t fit both Category 1 and 3 , do not undertake leverage or borrowing other than to meet day-to-day operational requirements.

1. Private Equity Funds: A private equity fund invests in unlisted private companies. It is difficult for unlisted companies to raise funds by issuing equity and debt instruments. Usually, these funds come with a lock-in period which ranges from 4 to 7 years. 
2. Debt Funds: This fund primarily invests in debt securities of unlisted companies. Usually, such companies follow good corporate governance models and have high growth potential. They have a low credit rating, which makes them a risky option for conservative investors. As per SEBI guidelines, money accumulated by debt funds cannot be used to give loans.
3. Fund of Funds: Such funds invest in other Alternative Investment Funds. They do not have an investment portfolio but focus on investing in different AIFs.

• Category 3: AIFs which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. 

1. Private Investment in Public Equity Fund (PIPE): A PIPE invests in shares of publicly traded companies. They acquire shares at a discounted price. Investment through PIPE is more convenient than going for a secondary issue owing to less paperwork and administration.
2. Hedge Funds: Hedge funds pool money from accredited investors and institutions. These funds invest in both domestic and international debt and equity markets.They adopt an aggressive investment strategy to generate returns for investors. However, hedge funds are expensive as fund managers can charge an asset management fee of 2% or more. They can also levy 20% of the returns generated as their fees.

Who Can Invest in an AIF?

Investors willing to diversify their portfolio can invest in AIFs if they meet the following eligibility criteria:
Resident Indians, NRIs, and foreign nationals can invest in these funds.
The minimum investment limit is Rs. 1 crore for investors, whereas the minimum investment amount for directors, employees, and fund managers is Rs. 25 lakh.
AIFs come with a minimum lock-in period of three years. 
The number of investors in every scheme is restricted to 1000, except angel funds, where the number of investors goes up to 49.

Benefits of Investing in AIFs

1. Uncorrelated with Stock Market

Every investor who has the stock market for a long time has certainly had some large successes and some significant losses. Anyone who is nearing retirement or has already retired has felt the pain of watching their portfolio decline, often dramatically. One of the key reasons investors seek alternative investments is to diversify their portfolios.
Many investors are discovering private alternatives as a method to diversify their portfolios and hedge against volatility. As a result, if the stock market falls sharply, they will have a hedge of protection, and their whole investment portfolio will be unaffected. Even in a stable economy, the stock market is notoriously unstable, and alternatives are mostly immune to the public markets’ volatility.

2. Look at the Direct Ownership

What you’re getting in most public investments is a paper asset — the discounted value of future projected earnings. You don’t actually have any possessions. Even after investment in REIT, you’re still a long way from having your name on the real estate property’s deed.
When you purchase excellent wine or art, you are purchasing the bottles of wine or the oil painting directly. If you purchase a rental property, you own it outright. You have a lien on a property if you acquire a mortgage note.

3. Know about the Tax Benefits

Alternative investments might potentially offer significant tax advantages. Because of the structure of many alternative investments, you get to keep more of your profit. You should be a part of the fund or syndicate in many private alternative investments, and the tax benefits are passed on to you directly. Pass-through depreciation and long-term capital gains treatment are the two most major tax benefits. Depreciation expenditure (a non-cash expense) is deducted from net income by many real estate funds or syndications, lowering taxable income. Depreciation/depletion tax treatment for oil and gas assets is quite advantageous.

4. Identify the Passive Investments

Most busy investors value their time highly, and actively maintaining an asset or portfolio takes a significant amount of effort. Let’s look at real estate as an example, because that’s where most people assume they should start investing. They rapidly discover how much effort is necessary and how steep the learning curve is after becoming enthusiastic about the thought of renting a single-family house or even a modest multifamily apartment. There is a limitless supply of instructors marketing their “5 Step Plan to Success,” but recruiting co-investors, securing money, structuring the deal, discovering and appraising properties, and so on are all difficult tasks. Many investors quit up at this stage and think that there are no further possibilities.