What is an Alternative Investment Fund (AIF)?
Alternative Investment Fund or AIFs are the pool of funds meant for investments in Alternate assets like new ventures as venture capital, or in high growth enterprises in the form of private equity, or may be derivative strategies as in hedge fund or managed futures, etc. Simply speaking, AIF are meant for investments in non conventional investment products or avenues unlike conventional products such as listed stocks, bonds or other securities like ETFs, etc.
AIFs are designed as a product for High networth individuals or seasoned investor looking for better return products or strategies for meeting their investment goals. SEBI designed the guidelines under Regulation 2(1)(b) of the Regulation Act, 2012 of Securities and Exchange Board of India (SEBI) where they allow establishment of Alternate Investment Fund in the form of a company or a corporate body or a trust or a Limited Liability Partnership (LLP).
Classification of AIFs
SEBI allows AIFs in 3 different categories. Let us understand the various categories of AIFs and types of funds
As per SEBI guidelines, and an AIF may be classified into three major categories:
Category I:
Category I is meant for funds that invests in StartUps, New businesses or SMEs (Small and Medium Enterprises) which are having potential of high growth. Ventures starving for funds but with great ideas gets support from such AIFs and make way for good returns for its investors. Such investments are also supported by the Government, may be directly or indirectly, as it also helps in economic growth and job creations as well. Different funds that are classified as Category funds are
Venture Capital Fund (VCF)
Such funds invests in startups or new ventures which are working on high growth products or initiatives are looking for investments. Venture Capital funds invests in such startups basis the business profile or idea of business and support in product development and eventual start of production.
It is actually an early stage investing into the business and being working on low capital and valuation, VCFs get higher stake at relatively lesser valuation. With product development and commercial launch the company witnesses a high growth and thus an exponential jump in valuations, which results in goods returns for investors.
Infrastructure Fund (IF)
Such is the fund that invests in projects of infrastructure development and requires high capital infusion. With development of infrastructure, a consistent stream of revenue get generated like toll roads, Toll bridges or large commercial buildings etc. The Investors get their returns out of capital growth due to increased valuation or dividend income coming out of recurring revenues.
Especially for social initiatives, Government also provides benefits like tax benefits or subsidized land. Enjoying such benefits, such infrastructure assets become a long term investment promising good return for investors.
Angel Fund
This is another fund that pools money from various angel investors (mostly HNIs) who look forward to invest in the ventures at budding stage. This fund not only invests but also brings in the management experience along with the contacts in the industry. The Fund actively participates in the Management decisions of a the startups and hand hold till the business become profitable one.
This transformation helps business to achieve profitability and command a higher valuation thus generating good rewards for the angel investor.
Social Venture Fund
With upcoming Social revolution, lots of Social entrepreneurs are budding. They are trying to solve social issues while making way for their existence and profits. Social Venture funds invests in such ventures which along with the social cause also looks forwards to make consistent profits.
Such funds invests in projects such as rural development, environmental protection or any other such social causes mostly in developing countries. Even the complete philanthropic investments also attract a reasonable level of returns. Sometimes the success of initiatives in the less developed society becomes a great business model once it gets the developed ones. Thus making a great scope for capital appreciation and consistent returns.
Category II
Such types of funds invests in various securities like Equity, debt or ETFs. Any fund that are not classified as Category I and Category III are covered in this category. Being the normal way of investment, it do not enjoy any favour from Government nor any incentive.
Different fund classified under this category are as follows
Private Equity (PE) Fund
These types of fund primarily invests in unlisted companies which are privately held and planning go public or listed in couple of years. It always remains a challenge for smaller privately held companies to raise capital thus such funds resolves their such issues. Normally, any Private Equity Investment ranges form the duration of 3 to 7 years.
Generally, the phase when private equity enters when the company try test their product and started selling small. However due to higher demand of product in the market, they are not been able to cope with same. The Private Equity investment helps companies with more capital to enhance the production and meet such sales demand.
Such phase of companies is mostly the very high growth phase. Sometime companies in this phase grown exponentially also, thus making handsome gain for the investors.
Debt Fund
The Fund that majorly invests in debt instruments companies be it a listed or unlisted one. Companies with consistent business and good corporate governance are the good avenue for debt investment. These companies lack the high growth rate however running a very stable and consistent business. With limited risk, this Fund build a pool of investor capital and lend to such companies are relatively better rate of interest.
Fund of Funds
With lots of Equity and Debt funds in place, these funds creates a portfolio of various funds with different investment strategies. The major criteria of investment for such funds remains the return and relative risk in various other investment funds. Being the combination of various funds, these funds remains the well diversified and actively allocated.
Category III
This category of fund focuses on short term investing decision generating immediate returns. Such funds focus on various investment strategies that may or may not involve derivatives and generate returns for its investors. With an aim of short term capital appreciation, funds covered under this category are not risk averse but strive to get extremely aggressive returns.
The fund classified in this category are as follows :
Hedge Fund
The name is taken from the international markets to make it easier to understand for investors. Such funds pools in the money from not risk averse investors that may or may not include institutions, and invest in a high leverage investment strategy. The leverage enhances the investment returns. Such funds has couple of quality derivative and technical analysts which keeps a close track on markets and keep deriving strategies for generating best returns for investors.
Private Investment in Public Equity Fund (PIPE)
Such funds are quite similar to Private Equity funds with only difference that such funds invests in shares of public listed companies. Such funds capitalize on the under valued stocks, opportunities arising out of corporate actions or building the size of company further. The Fund takes a stake in such publically listed enterprises and capitalize on its growth and dividend.
