Alternative Investment Funds in India - and their 3 categories

Alternative Investment Funds are a type of pooled investment vehicle popularly used by top asset management companies in India, that raises money from institutions and high-net-worth people with a minimum ticket size of Rs.1 crore, including Indian, foreign, and non-resident Indians. They are an alternative to traditional investments such as direct equities, mutual funds, and bonds, long-short fund as their name implies.

 

Let's take a closer look at the AIF structure.

 

Structure of AIFs

 

According to SEBI's classification, AIFs can be classified into three distinct types, which are as follows:

 

Category I

 

This type of AIF invests in start-ups, early-stage initiatives, social ventures, small and medium-sized firms (SMEs), infrastructure, social ventures, or other areas deemed favourable and useful by government authorities, whether socially or economically. As a result, Cat I funds are likely to have economic spillover effects, and the government may consider providing incentives or concessions in exchange for their services.

 

Category II

 

AIFs in this category include debt and private equity funds. The category was developed to provide a defensive investment option in which professional fund managers build and manage diversified investment portfolios to lower investors' risk profiles. Debt funds in this category invest in debt/debt securities of listed or unlisted investee companies in accordance with the fund's declared goals.

 

Category III

 

To produce returns, Cat III AIFs use complex trading tactics such as arbitrage, margin, futures, and derivatives. Hedge funds that trade for short-term gains and Private investment in public equity (PIPE) funds that buy publicly traded stock at a discount to the market price, as well as other similar types of funds, are eligible to be registered as AIFs in this category.

 

When compared to mutual funds, AIFs are now a faster-growing investment vehicle in India. Due to a variety of variables, including minimal vulnerability to stock market volatility, the capacity to create better returns than stocks and mutual funds, risk diversification from traditional asset classes, and so on.