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A few years ago, investing in traditional investment categories like shares, bonds, real estate, FDs, etc., was the only method to accumulate financial assets in India. There is an increasing demand for unconventional investment options due to the country’s rising high-net-worth population. Due to this, our capital market and financial stability have been impacted by the AIFs.
Alternative Investment Funds (“AIF”) are a particular category of unconventional investment options. AIF is a fund that investors can use to make investments and profit from them. AIFs are a fund that assembles capital from knowledgeable private investors. Alternative investment funds are a realistic option for savvy investors who want to diversify their holdings.
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The funds raised will be invested in accordance with the AIF’s investment strategy. AIFs are not subject to the mutual fund regulations of the SEBI. The SEBI (AIF) Regulations 2012 (the “AIF Regulations”), however, were introduced in 2012 by the Securities and Exchange Board of India (“SEBI”) to recognise AIFs. In India, an AIF may be incorporated as a trust, company, Limited Liability Partnership (LLP), or body corporate.
A consultation paper on the proposed revision to the SEBI (Alternative Investment Funds) Regulations, 20121, was published by the (SEBI) Securities Exchange Board of India on May 18, 2023. This Consultation Paper’s goal is to improve the Alternative Investment Funds (AIF) governance structure.
Alternative Investment Fund is a privately pooled investment vehicle that gathers assets from affluent people to invest for the benefit of their investment in accordance with a set investment policy.
A fund founded or incorporated in the form of a company, body corporate, trust, or LLP, which is a privately pooled investment vehicle, is defined as an AIF under Regulation 2(1)(b) of the AIF Regulations. It receives money from investors to invest for the benefit of investors in accordance with a set investment policy.
People continuously consider the advantages of AIFs and other funds when investing in a fund. Let us understand the advantages of AIFs:
Many investors have discovered private alternatives to diversify their portfolios and hedge against volatility. As a result, if the stock market falls, they will have a hedge of protection, and their total 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.
The two most significant tax advantages are long-term capital gains treatment and pass-through depreciation. Many real estate funds or syndications cut their taxable income by deducting depreciation expenditure (a non-cash item) from net income. The depreciation and depletion tax treatment for oil and gas assets is highly favourable.
Different perspectives are there in impacting the capital market and financial stability in alternative investment funds. Below are some important points that impact the capital market and financial stability:
It is crucial, and it should be remembered, that the effect of alternative investment funds on capital markets and financial stability can change depending on the particulars of each fund, the regulatory landscape, and the market environment. In order to strike a balance between fostering market expansion and preserving financial stability, regulatory authorities and policymakers continuously evaluate the possible risks and benefits associated with AIFs.
Read our Article: Benefits of Investing in AIF (Alternative Investment Funds)
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