Today’s Indian Financial Market is flooded with varied options of investments like the traditional options namely, mutual funds, stocks etc. and the unconventional options like Alternative Investment Funds.
If you are perplexed about where to invest your investible surplus, Alternative Investment Funds are a very good option currently, provided you are willing to take the additional risk.
To invest in an AIF and reap good profits, you need to be well-read about these funds, which have a bright future in India especially with the High Net-worth Individual (HNI) clients.
How to Invest in an Alternative Investment Fund (AIF) in India?:
- What is an Alternative Investment Fund?:
- Classification of Alternative Investment Funds:
- SEBI Regulations devised for the Alternative Investment Funds:
- How to invest in any Alternative Investment Fund?:
So let us delve deeper to understand the different nuances of Alternative means of investing in funds and its benefits thereof.
1) What is an Alternative Investment Fund?:
Alternative Fund Investment AIF varies from regular traditional asset class investments like stocks, securities, debt securities and debentures etc.
AIF refers to a privately pooled fund formed by investments made by some sophisticated and private investors, who are risk lovers and are keen on taking a high risk with surplus money.
The AIF in India is established either as a company, Limited Liability Partnership (LLP), trust or a corporate body. This asset class includes venture capital funds, private equity, angel funds and hedge funds.
If you are an investor meeting all the investment eligibility criteria and prefer to have a well-diversified portfolio, the Alternative Investment Fund is the best option for you.
All the Indians like the Non-Resident Indians, Persons of Indian Origin (PIOs) and Overseas Citizens of India (OCIs), are allowed to invest in the Alternative Investment Funds.
The alternative investment platform includes investment options like private equity, hedge fund, venture capital, and angel fund etc., according to the drafted investment strategy for investing in the AIF.
These funds do not come under the purview of the Securities and Exchange Board of India (SEBI) mutual fund regulations.
Here a complete guide on Alternative Investment funds
However, the Alternative Investment products come under the purview of Regulation 2 (1) (b) of the Regulation Act, 2012 of SEBI.
The Securities and Exchange Board of India classifies the Alternative Investment Funds into three broad categories as in Category I, Category II and Category III.
Since the transaction costs for Alternative Funds are lower than the traditional investments, minimum investment limit and processing fees required to invest in AIFs are steeper than the conventional investments. Due to lower turnover, the cost of transaction in AIFs are lower than the traditional investments.
The specialty of Alternative Funds lies in the fact that they have lesser potential to advertise to the potential investors and hence do not share any information relating to the fund publicly.
2) Classification of Alternative Investment Funds:
The Securities and Exchange Board of India (SEBI) registered Alternative Investment Funds can be categorised into three broad groups, as under:
1) Category I Alternative Investment Fund:
Category I Alternative Investment Funds usually invest in start-ups or Small and Medium Enterprises or ventures in their early-stages or infrastructure or social ventures, etc.
These sectors are considered as socially desirable or economical by the Government of India as well as the regulatory bodies.
Here are the sub-categories of investment under Category I of AIF:
Venture capital funds:
This is a type of financing of equity that primarily invests in start-ups and emerging businesses which have been planning for a long term growth curve.
Venture capitalists often participate in the regular operations of the company. They cannot borrow funds directly or indirectly to manage their operations.
The venture capital funds are close-ended investments with a bare minimum period of about three years, which can be extended up to two more years with prior approval from the AIF unit holders under special circumstances.
Though investments in other subcategories of Category I Alternative Investment Funds are permissible, investments in Fund of Funds (FoFs) are not allowed.
Angel funds are a subcategory of venture capital funds which comply with the regulations of Chapter III-A of the SEBI AIF Regulations for making investments.
They usually comprise individual investors who have net tangible assets not less than INR 2 crores, with a minimum of ten years of senior professional experience.
They also refer to a corporate body having a bare minimum net worth of INR 10 crore and do not accept investments lesser than INR 25 lakhs for a maximum duration of three years.
SME (Small and Medium Enterprises) Funds
These funds are usually invested in small and medium enterprises, micro-enterprises which could be listed or unlisted. Since SME funds provide equity finance for the NBFCs, the debt is raised through them.
The minimum investment for these funds is capped at INR 1 Crore, with a minimum tenure for lock-in tenure of three years, which can be extended further by two more years.
Social Venture Capital Funds
These funds are also known as ‘Impact Funds’ as they provide funding for ventures that have a positive impact on lives, while they analyse the social impact that is created by the business on the society.
These funds have a minimum investment amount of INR 1 crore and lock-in period up to three years, which can be extended further by up to two more years.
The SVC funds engage in theme-based investments in India, namely education, agriculture, affordable healthcare and clean energy.
Apart from facilitating seed investment, these funds also help the businesses with operational as well as technical support whilst laying down the regulations for governance and compliance, for additional funding. Usually, the returns are shared by both the investors and the fund.
These funds mainly invest in companies that develop infrastructure and housing projects, while raising capital even from different private investors and permitting only one thousand investors per scheme.
These funds include investments made in infrastructure projects namely roads, railways, municipal solid waste, water as well as renewable energy.
These close-ended funds are tradable on the stock exchanges with a minimum tradable amount of INR 1 crore and a minimum tenure for lock-in period of three years, which is expandable up to two more years.
Usually, the investors can easily liquidate their investments within a period of one year of the expiry of the tenure of the fund. Infrastructure funds get a lot of incentives and concessions for investment and can thus invest in various other subcategories of Category I AIF, though cannot do so in Fund of Funds (FoFs).
2) Category II Alternative Investment Fund
Category II AIFs do not undertake any sort of borrowing or leverage except for meeting the daily operational requirements.
The minimum corpus for these schemes is under INR 20 crores with a minimum amount of investment being INR 1 crore, with a minimum tenure for lock-in period of three years.
They are allowed to invest only with other AIFs or buy stocks of unlisted companies. These funds engage in the activity of hedging and accept joint investments, where the investment amount cannot be lesser than INR 1 crore.
There is no incentive or concession from the Government for these funds. Following are the subcategories under Category II AIF:
Private Equity (PE) Funds
Private Equity funds take complete ownership of the company as they cannot raise funds by equity and invest in unlisted private companies. These funds have a fixed tenure for investment, with a lock-in period ranging between four to seven years.
Debt Funds –
These funds generally invest in debt securities. The investments are done in either listed or unlisted companies according to the fund objectives, while they may be facing a debt crunch.
Funds of Funds
The funds of funds (FoFs) invest in several alternative investment funds, which follow a strategy of investment to invest in other Alternative Investment Funds. They cannot make their own dedicated investment portfolio and do not issue any units of the specific fund to the open public.
3) Category III Alternative Investment Funds
SEBI registered Alternative Investment Funds of Category III, apply various trading strategies like futures and margin trading, arbitrage and derivatives trading while investing in listed or unlisted derivatives.
These funds are of two types – open-ended or closed-ended funds and are way less regulated than the traditional funds.
Thus, their information is not published regularly and the Indian Government does not give leeway for investing in these funds.
They are classified into two types:
Hedge funds pool investments from private investors to invest in internationals as well the domestic markets using several trading as well as investment strategies.
They are held for long or short positions in securities and in listed or unlisted derivatives. They use leveraging options and strategies and are aggressively managed.
They are quite expensive as compared to its peers as the fund managers charge a hefty fee of about 2% of the investment and about 20% share of the profits.
Since the hedge funds are vulnerable to market movements, associated risks and returns are higher as compared to traditional investments.
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Private Investment in Public Equity (PIPE)
The fund managers in this strategy often buy stocks of publicly traded companies, but at a discounted price. This helps the businesses to put in or infuse substantial capital into the operation of the business.
These transactions require less administrative work as compared to a secondary public issue while helping the medium and small-sized businesses to fund their projects with ease.
It is easier to fund an issue with PIPE as compared to any secondary issue, which makes PIPE the most preferred method of capital inflow due to discounted share price value.
If you are planning to invest in any Alternative Investment Fund (AIF) registered under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, you need to be aware that these funds are usually incorporated in the form of a company or a trust or a limited liability partnership (LLP).
These regulations came into force for the first time on 21st May 2012 and usually aim at regulating the activities performed by the private pool of AIF. All information pertaining to the AIF is stated in the SEBI (Alternative Investment Funds) Regulations 2012 and circulars are available on the SEBI website.
There are certain listed criteria under the AIF regulations on the number of investors and the validity of the registration certificate of the entity.
SEBI guidelines specify that no AIF scheme should have more than one thousand investors except for an angel fund, which could have up to a maximum of forty-nine angel investors.
You should be aware that the AIF cannot subscribe to the units publicly rather can only invest through private placement by the issue of the information memorandum or placement memorandum.
If you were to invest in an AIF, you would be curious to know about its several launch schemes.
The AIF is allowed to launch schemes in accordance with the filling of the placement memorandum with the Securities and Exchange Board of India.
However, the AIF is entitled to pay a scheme fee of INR 1 Lakh to SEBI, at least thirty days prior to the launch, in order to fill the placement memorandum. There is an exception to the payment of scheme fees in case it is an angel fund or it is the first scheme launched by the AIF.
Read a complete guide on SEBI rules for Alternative Investment Funds
4) How to invest in any Alternative Investment Fund?:
If you are a risk-loving investor and like to diversify risk, you can invest in the SEBI registered Alternative Investment Funds.
You have to be eligible to invest in AIFs, usually, it is the resident Indians, Non-Resident Indians (NRIs) i.e. who have settled abroad and foreigners, who are eligible to make investments in Alternative Investment Funds.
If you are a general investor, your permissible limit will be INR 1 crore; whereas the minimum investment limit is INR 25 lakhs for the angel investors.
Similarly, the minimum amount for investment is INR 25 lakhs for the senior management like the directors, fund managers and all the people who work for the AIF.
If you are an investor who is willing to make an investment in these unlisted as well as partially illiquid securities, you should be prepared to undertake the associated underlying risk.
An Alternative Investment product cannot openly invite the public to subscribe to its units, rather they can only raise funds from the esteemed investors through a private placement.
So, if you are a potential investor, you have to invest through a private placement. AIF schemes launched by SEBI are supported by the filling of its placement memorandum.
After payment of the registration fees, once the certification is done by SEBI that the AIF has been registered, the AIF contacts the stock exchanges for the listing of the funds by submitting an investment management agreement or a placement memorandum, in accordance with Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012. You have to submit your income proof, ID proof and the PAN card to invest in an AIF.
To start your investment in AIF through Koppr, all you need to do is:
1) Log in to Koppr.com
2) Go to the ACT section as shown in the screenshot
3) Scroll through the details to the AIF that you are interested in and click on “I am Interested” tab
And start your exciting investment journey with AIF through Koppr App Download Now!.
Since the last seven to eight years, the AIF industry has been gaining popularity amongst the High Net worth Individuals (HNIs) as they prefer to diversify their surplus assets. The investment mechanism is fairly simple and is gradually becoming the most preferred vehicle for diversified investment amongst the risk-loving investors.