A Beginner’s Guide To Alternative Investment Funds (AIFs)

Alternative Investment Funds(AIF) are in high demand among HNIs and institutional investors, and India’s investment landscape is growing at a fast pace. The asset size of the AIF market in India had reached ₹6.94 lakh crore as of the end of March 2024, having grown at an approximate rate of 30% every year. AIFs attract this investor class as they are seeking higher returns and more diversified options beyond the standard stocks and bonds. This white paper takes a broad overview of AIFs-they cover different types, key regulations, and how to register an AIF-on the last page of which you’ll learn how to assess whether AIFs match your goals.

What Are Alternative Investment Funds (AIFs)?

An AIF, is a privately pooled investment vehicle that collects funds from sophisticated investors for investment into securities other than traditional equities and bonds. It can be said that the regulations and rules of the AIFs in India under SEBI (Alternative Investment Funds) Regulations, 2012, have become the epitome of an important addition to the investment ecosystem by chipping in towards infrastructure, even through startups and distressed assets.

Key Features of AIFs:

• Pooled Investment: Numerous investors contribute funds to be professionally managed by the fund managers.
• Other, not-so-conventional asset classes: They invest in alternative assets like private equity, hedge funds, real estate, and venture capital, among others.
• Designed for HNIs: AIFs, with minimum ticket sizes of ₹1 crore, are primarily available to high-net-worth individuals (HNIs), family offices and other institutional investors.

Types of Alternative Investment Funds

AIFs have been categorized into three, which cater to different types of investors and regulatory regimes.

Category I AIFs

These types of funds invest in social or economic activities such as start-ups, infrastructure, and SMEs. Category I AIFs are often exempted from certain regulations as they contribute to the country’s economic development.

Some of the Key Types

• Venture Capital Funds: This type of fund mainly focuses on early-stage businesses that have a high potential for growth.
• Infrastructure Funds: This segment would include the infrastructure developing projects of roads, bridges, power plants, etc.
• Social Venture Funds: These would raise financial returns in addition to some social returns.

Category II AIFs

Category II AIF is not exposed to any of the preferential or special privileges/controls of SEBI. Chiefly these consider the instruments of equity and debt.

Major ones are:

• Private Equity Funds: Invests in a company that is unquoted publicly, or will require a controlling share such that the companies can utilise those for attempting to make decisions over business lines.
• Debt Funds: Invest in debt securities including corporate bonds, debentures, and structured debt instruments.

Category III AIFs

These funds are using sophisticated strategies which include leverage and derivatives. Most of the funds fall in the category of hedge funds.

Key Features:

• Short-Term Orientation: It is using the strategy of short-term gain through trading in derivatives and arbitrage.
• High-Risk, High-Return: These funds are meant for investors with a high risk appetite.

source: https://nbfcadvisory.com/a-beginners-guide-to-alternative-investment-funds-aifs/