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09/10/2017

Alternative Investment Funds

Alternative Investment Funds are the investments which do not happens through traditional modes of payments like cash, property, bonds, stocks etc. Regulation 2(1)(b) of Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 define Alternate Investment Funds as  any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which is

– Not covered under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities.

– Private investment such as mutual funds  whether Indian or foreign which collects funds from investors for investing it in accordance with a defined investment policy for the benefit of its investors

The funds which comes under the ambit of AIF are:

  • Infrastructure Equity Fund
  • Private Equity Fund
  • Real Estate Fund
  • PIPE (Private Investment in Public Equity ) Funds
  • Venture Capital Funds
  • Debt Funds
  • Social Venture Funds

Types Of AIFs:

SEBI has permitted three categories of AIFs. They are:

1. These includes infrastructure funds, venture capital funds, social venture funds, SME funds. All these get incentive from the government.

2. These are not given any special incentives or concessions and can invest anywhere without raising any debt. They can however consider the latter route for meeting their daily requirements. Private Equity funds, Debt funds etc. are included in this category.

3. This includes Hedge Funds which operates to make short terms gain without concessions.

Foreign investors can also invest under this AIF. This has been announced in Budget 2016 that the foreign investments will be allowed in alternative investment funds (AIFs). The AIFs usually have a high limit of minimum investment to the tune of INR 1 crore as per Security and Exchange Board of India Regulations, 2012.  It is basically directed at high net worth individuals. The total amount which is to be committed by investors in the investee company or trust by written contract or agreement should be a minimum of INR 20 crore.

Alternative Investments for Diversification and Hedging

Alternative investments typically have a low correlation with those of standard asset classes, which makes them suitable for portfolio diversification. Because of this, many large institutional funds such as pensions and private endowments have begun to allocate a small portion of their portfolios, typically less than 10%, to alternative investments such as hedge funds. Investments in hard assets such as gold and oil also provide an effective hedge against rising inflation, as they are negatively correlated with the performance of stocks and bonds.

Alternative Investment Costs and Tax Considerations

Although alternative assets may have high initial upfront investment fees, transaction costs are typically lower compared to conventional assets, due to lower levels of turnover. Alternative investments held over a long period of time may result in tax benefits, as investments held longer than 12 months are subject to a lower capital gains tax in comparison to shorter-term investments.

Accessing Alternative Investments Through ETFs

While the majority of retail investors may have limited availability to alternative investment opportunities, real estate and commodities such as precious metals are widely available. ETFs now provide ample opportunity to invest in alternative asset categories that were previously difficult and costly for the retail investor to access.

Wealthy investors are pumping in thousands of crores into alternative investment funds (AIFs) as they increasingly use asset classes other than the conventional stocks and bonds to play the India story.  Assets under management by India-focused AIFs have swelled 90% over the past year, thanks to the increasing interest of high-net worth investors in the unique structures and themes of these funds that also face fewer regulations than other instruments like mutual funds. High valuations in the equity markets have also promoted savvy investors to move to other asset classes, industry experts said.

AIFs have so far raised investment commitments for Rs 96,021 crore, compared with INR 50,441 crore at this time last year, latest data from the Securities and Exchange Board of India showed.  These numbers are of funds committed by investors to AIFs by way of a written contract or other documents.The total funds they actually raised have risen to INR 48,128 crore as on June 30, 2017 from INR 26,003 crore a year ago, and just INR 7,013 crore three years earlier.

The sharp growth in the AIF industry is largely on account of growing awareness among affluent investors to invest their money in quality unlisted companies and high-yielding real estate through venture capital funds or the private equity route “Since the equity market is richly valued, HNIs are finding structured products in AIF space more attractive with capital protection along with appreciation.”

By Nishad MUKHERJI

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