AIF Registration

Penetration Of Alternate Investment Funds In India And Its Growth

Alternate Investment Funds are the best option if you are seeking alternatives to traditional investments like cash, bond, and stocks. These programmes have higher rates of return than traditional options, but they need larger investments and carry greater risk than mutual funds. These funds target sophisticated investors like HNIs from India and abroad who have access to capital rather than the general public. The majority of alternative investment assets are held by accredited, high-net-worth individuals (HNIs), or institutional investors because of their complexity, absence of regulations and lack of liquidity.

Alternate Investment Fund

Alternative Investment Funds (AIF) have grown exponentially in India since they were first introduces in 2012. There are more investors entering this industry every day.

Regulation 2(1)(b) of the Securities and Exchange Board of India (Alternative Investment Funds) Regulation, 2012 provides a definition of alternative investment funds (AIFs) in India. It refers to any privately pooled investment fund established and organised as a trust, a company, a body corporate or a Limited Liability Partnership (LLP).

They are neither covered by any SEBI regulations governing fund management (such as the Regulations Governing Mutual Fund Regulations, 1996, or Collective Investment Scheme Regulations, 1999^[1]), nor do they fall under the direct control of any other specific regulators in India like IDRA, PFRDA, or RBI. AIFs are therefore private funds in India that are not otherwise subject to the control of any other regulatory body in India other than SEBI.

Hedge funds, venture capital, private equity, angel funds, real estate, commodities collectibles, structured products, etc are all examples of alternative investment funds. Investors can buy AAIf funds for benefits and investment diversification. High net worth investors, retail investors, and individuals often preferred AIF funds. They are challenging to buy and sell, however, in contrast to traditional assets. The government is making an effort to make these alternative investment schemes more transparent.

Different Types of AIFs in India

Commodities, angel funds, and other alternative investment opportunities are among the investments made by AIFs. Alternative Investment Funds must apply for registration in one of the three categories in 2012, in accordance with Securities and Exchange Board of India (AIF) Regulations.

Category 1-  Mainly invest in start-ups, SMEs, or any other industry that the government deems to be both commercially and socially viable. 

Category 2- These are alternative investment funds, such as debt or private equity funds, for which the government or another regulator does not specifically offer any incentives or concessions.

Category 3- Funds such as hedge funds or funds that trade with the intention of generating short-term returns, or other open-ended funds for which the government or any other regulator does not specifically offer incentives or concessions.

Benefits of AIF Investments

General Economic Benefits – Better corporate governance through activist managers, increased market liquidity, higher performance returns, and the free flow of capital for both small and large corporations are just a few of the positive effects of the emerging alternative funds on the economy that have been well documented. The Sector has encouraged the growth of the economy, the development of new financial products, and the creation of jobs.

Security against volatility – A solid method to safeguard your money from volatility and stabilise your portfolio is investing in alternative investment funds. These schemes avoid investing money in publicly traded investments. As a result, they are unrelated to the broader markets and do not fluctuate in response to their ups and downs.

Profitable Returns – As these funds provide a wide range of investment alternatives, AIF investment returns are advantageous. Compared to traditional investment options, they offer a better source of passive income. Additionally, these schemes are not connected to the stock market, the returns are less susceptible to volatility. 

Excellent Portfolio Diversification – Compared to most other investment vehicles, AIFs allocate their funds to a far wider range of assets. They offer great portfolio diversification, which helps to protect your investments during times of market turbulence or financial crises.

Top Alternative Investment Funds in India

Hedge Funds – Hedge funds are a class of alternative investment funds that raise money from investors to invest in local and international debt as well as highly risky equity markets. Hedge funds provide significant returns to investors because they employ an aggressive investment strategy. These fund managers demand a high management fee of 2% to 20% of the total yearly returns. They are highly preferred by authorised investors with high net worth.

Private Equity – Private equity funds make investments in businesses that are not publicly traded. Private businesses are unable to raise public financing because they are not listed on public exchanges. So they use private equity funds to raise money. The investment time frame is considerably long. In India, private equity funds have raised about $100 billion over the last 13 years. As a result, they are crucial to the growth of small and medium businesses.

Commodity – Oil, grain, agricultural products, energy, metals, etc are examples of commodities. These can be brought and sold. Investing in commodities is a wonderful strategy to hedge against inflation because when inflation rises, the price of commodities rises along with the price of other things. However, the macroeconomic factors that influence the commodities markets make them vulnerable to market instability. Investors should therefore think about these factors before making a commodity market investment.

Real Estate – Prior to the introduction of REITs (real estate investment trusts), investors could only invest in real estate, if they had a considerable amount of money, typically between a few lakhs and a few crores. However, investors can invest in real estate with as little as 5,000 to 10,000 rupees. With the use of some platforms, investors can purchase real estates, such as offices and commercial buildings, for a little investment. These properties already have a tenant who pays rent each month, ensuring a steady flow of money for the property owner.

Venture Capital – Venture capital funds are the kinds of funds that invest in young, fledgling businesses that require money to grow and improve their operations. After the US and China, India has one of the largest startup ecosystems worldwide. As a result, startup business owners can obtain funding from venture capital funds. The primary goal of venture capital is to aid in the expansion of goods and services while assisting in business scaling. Depending on the companies that venture capital funds have invested in, investors may receive rewards.

Peer-to-peer lending – Traditionally, P2P lending included people depositing money in a bank to earn interest and then lending that same money to borrowers who agreed to pay the bank a set amount of interest. The bank holds the difference between the interest that the borrower pays and the interest that the depositors earn. Modern P2P lending does not use banks, so lenders and borrowers can earn more interest. Banks have certain terms and conditions, such as who can borrow, how much one can borrow, and at what interest. P2P lending is risky as there is always a chance of the borrower defaulting. Therefore, before investing, investors should complete their proper research.

Angel Funds – This is a form of alternative investment fund that aggregates the money of many investors who are eager to put money into startup companies in their early stages. Investors receive dividends after the new enterprises turn a profit. Angel investors support the expansion and profitability of businesses.

Reasons for Alternative Investment Funds growth in India

Numerous elements, some of which are listed below, influence the growth of ALFs in our nation.

• The increasing real estate industry has led to a significant rise in alternative investment funds in India. The Indian government’s establishment of the NIIF (National Infrastructure Investment Fund), which has approved a big budget, is one of the major factors contributing to the rise of AIFs.
• Investors are more likely to invest up to 10% of the available funds in category 3. Additionally, they are permitted to benefit up to thrice. Since 2015, the Reserve Bank of India has also made a notification which is applicable for AIFs foreign investment through the automatic route.
• FDI restrictions will apply to AFIs if the person in charge of the fund is an Indian Territory resident. It would be regarded as a local fund if foreign capital made up the majority of the AIF.
• There is a tax pass-through structure being used for the category 1 and 2 funds. Investors will manage their tax responsibilities for these groups and can easily avoid the problem of double taxation by doing this.
• However, there is still an opportunity for improvement to ensure long-term growth stability.

Conclusion

In the upcoming years, the rise of Alternative Investment Funds will undoubtedly have a sustainable future. There will be an increase in the number of investors, which will help to expand the Indian economy. The SEBI has done an excellent job of creating highly detailed regulations, standards, and criteria for various types of funds in accordance with the risk-return perspective involved in the same and desirable economic and social possibilities. Global investment, productivity, and employment all rise as a result of the effort of alternative investment funds on the economy as a whole.

Read our Article: Alternative Investment Funds India – A Fund of new opportunities