Alternative Investment Fund (AIF) is one of the growing asset classes in India. It is a privately pooled investment vehicle and differs from conventional investment instruments. It collects funds from sophisticated investors usually institutions and HINs in India as well as foreign countries. AIFs (alternative investment funds) follow a defined investment strategy and aim to generate higher returns for their investors.
Types of Alternative Investment Funds (AIFs) in India
SEBI (Securities and Exchange Board of India) has divided alternative investment funds into three categories based on their investment objectives, strategies, and regulations.
Category 1 of AIFs
These funds are invested in new but high-growth potential businesses like start-ups and SEMs (small and medium enterprises). The government encourages investors to invest in these ventures as they have a positive impact on the economy of the country, offering high output and job creation. Examples of this category are as follows:
- Venture Capital Funds (VCF)
- Angel Funds
- Infrastructure Funds
- Social Venture Funds
Category 2 of AIFs
These funds are invested in equity securities and debt securities. The Government does not offer any concession for the investment made for category 2 of AIFs. This category includes the following AIF options:
- Fund of Funds (FOF)
- Private Equity Funds
- Debt Funds
Category 3 of AIFs
These funds are known for yielding returns in a short period of time. These funds use complex and diverse strategies to achieve their goals. These funds also do not have any government benefits. The following funds come under category 3 of AIFs.
- Hegde Funds
- Private Investment in Public Equity Funds (PIPE)
Benefits of Alternative Investment Funds
There are several benefits of investing in AIFs. The top benefits are as follows:
- Have a higher return potential than other investment options.
- Low volatility as compared to traditional investments.
- Allow the diversification in an investment portfolio in terms of market strategies.
- Have strong potential to improve performance.
Alternative Investment Funds FAQs
What is a fund of funds?
A fund of funds (FOF), also known as a multi-manager investment, is a pooled investment required to invest in other types of funds. This specific fund aims at achieving broad diversification and proper asset allocation.
What is a debt fund?
A debt fund is a fund that primarily invests in debt securities.
What are angel funds?
Angel fund is a sub-category of category 1 of AIFs. These funds are raised from investors called angel investors and invest in growing start-ups and small businesses.
What is the corpus of an AIF?
Corpus is a term given to the total amount of funds committed by investors to the AIF via a written contract on a particular date.
What is a private equity fund?
A private equity fund is a sub-category of category 2 of AIFs. This invests in unlisted private companies.
What are hedge funds?
A hedge fund is a sub-category of category 3 of AIFs. Hedge funds pool money from qualified institutions and investors and invest in both domestic and international debt and equity markets.
