Alternative Investment Funds more popularly known as AIFs are a different type of fund than regular mutual funds that pool different types of assets in a single fund to maximize the returns. AIFs on the other hand are a pool of investment of money gathered from different types of private investors. These private investors can include venture capital funds, private equity funds, hedge funds, infrastructure funds, etc. it is important to note that, unlike regular mutual funds, AIFs are not included under the purview of SEBI.
Although SEBI does not govern AIFs, they are covered under Regulation 2 (1) (b) of the Regulation Act, 2012 of SEBI. In India, AIFs can be formed as a company, Limited Liability Partnership (LLP), Corporate Body, or Trust and can be classified under three broad categories. The details of the same are provided hereunder.
This is the first category of AIFs that invests in startups, early-stage ventures, SMEs, social ventures, infrastructure, or other sectors. These investments in these sectors are considered to be economically and socially desirable and for the betterment of the country.
Venture capital funds are prime investors or sources of funding in startups and emerging businesses with strong growth potential. Investors in the venture capital funds invest in potential growth companies in an exchange for a share in their equity capital. Some of the key features of venture capital funds are highlighted below.
These are funds that raise capital or funds through angel investors. An angel investor can be any person that meets the following conditions.
The investor is an individual investor with a minimum of Rs. 2,00,00,000 as net tangible assets (excluding the value of their principal residence)
Such a person is an early-stage investor with experience as a serial entrepreneur and a minimum of 10 years of experience in a senior management professional role.
SME funds are the funds that invest in micro, small and medium enterprises that are listed or unlisted. SME funds provide funding in the form of equity financing to the target companies. Some of the key features of SME funds are mentioned below.
SME funds provide a minimum investment of Rs. 1,00,00,000
The investment tenure is a minimum of 3 years with an extension of another 2 years.
These are venture capital funds that invest in companies that have a positive social impact on society. These funds usually invest in companies that have an impact in areas like education, healthcare, sanitation, etc. The top features of social venture capital funds are mentioned hereunder.
These funds have minimum investment capital of Rs. 1,00,00,000 with a minimum investment period of 3 years that can be further extended for another 2 years.
Another important requirement is that the fund has to invest at least 75% of its assets in the ventures or businesses that have a positive impact on society.
These funds invest in businesses that focus on infrastructure projects. The Government of India also provides many incentives for investment in these funds. Some of the key features of infrastructure funds are highlighted below.
Any AIFs that do not fall under Category I and III as per SEBI classification are classified Category II AIFs. These funds do not undertake leverage or borrowing except for the purpose of meeting day-to-day operational requirements. Some basic highlights of these category funds are,
These funds invest in unlisted private companies in exchange for the ownership of the company. Private companies cannot raise funds by issuing equity or debt hence, these funds can be prime lenders for private companies. The minimum investment tenure for these funds is between 4 years to 7 years at the end of which they expect to make heavy good profits.
These funds invest primarily in debt or debt instruments of companies with good growth potential and sound business models along with good corporate practices that are in need of financial assistance. As per SEBI, debt funds cannot be used to provide loans.
As the name suggests, this fund invests in other AIFs to make its own fund. Unlike Fund of Funds under mutual funds, these funds are not open to the public i.e., Fund of Fund AIFs cannot issue any units of the fund to the general public.
AIFs under this category employ diverse or complex trading strategies that may employ leverage, through investment in listed or unlisted derivatives. These are open-ended and close-ended funds that are relatively less regulated and hence are not required to publish their investment information regularly. The details of the funds under Category III of AIFs are mentioned below.
These funds invest in domestic and international funds by pooling funds from institutional and accredited investors. Hedge funds have fewer regulations to abide by and as compared to other funds and use aggressive leverage strategies. Fund managers of these funds charge an asset management fee of 2% and a 20% share of profits as fees
It is a privately managed pool of privately sourced funds where the fund managers buy shares of publicly traded companies at a discounted price. These funds help medium and small businesses to provide funding to their projects with much ease and need less administration and paperwork as compared to a secondary issue. Funding through PIPE is faster hence it is preferred even though the capital received is less due to discounting of the share price.
Investment in AIFs is allowed for every Indian including NRIs, Person of Indian Origin (PIO), and Overseas Citizen of India (OCI). Further eligibility requirements for investing in AIFs are mentioned below,
Investment in AIFs is not open to the general public like units of a normal mutual fund. General investors who are eligible for investment in AIFs can do so through private placement rather than by subscribing to units like in a normal mutual fund or opening a Demat account like investing in stocks.
Investors have to pay the required registration fees and obtain the certification from SEBI. Upon receiving the certification in the prescribed manner, AIF will contact the stock exchanges for a listing of the fund through submission of the investment management agreement or a placement memorandum. The investors are also required to submit documents like income proof, identity proof, PAN Card as supporting documents as part of basic KYC to invest in AIF.
The taxation for AIFs is based on their classification under various categories of funds. As per the regulations of the presiding Act for AIFs, Category I and Category II are considered to be pass through vehicles which means that they are not usually liable for tax on their earnings. Investors are liable to pay tax as per their applicable slab rates. Investors are also liable to pay tax on the capital gains at the rate of 10% (long-term gains) or 15% (short-term gains) depending on the holding period. AIFs belonging to Category III are liable to pay tax at the highest slab rate
AIFs are a very good vehicle for huge investments in various sectors and have the potential to gain higher returns through investment in growth-oriented companies or new and dynamic ventures. There are many regulations that need to be complied with for such investments. However, they can become a good source of passive income for investors that have surplus funds and are looking for lucrative investment opportunities.
The registration fees to be paid by an AIF are,
-Category I AIFs – Rs. 5,00,000
-Category II AIFs – Rs. 10,00,000
-Category III AIFs – 15,00,000
-Angel Funds – Rs. 2,00,000
Some of the advantages or pros of investing in AIFs are the benefit of having a passive income, diversification, higher returns, and lower volatility than investments in conventional stocks. The shortcomings of AIFs, on the other hand, are liquidity issues, unregulated markets, the difficulty of valuation along with the high risk of investment.
The minimum corpus for every AIF is Rs. 20,00,00,000 (except for angel funds where the corpus fund required is Rs. 10,00,00,000)
The minimum tenure for Category I and Category III funds is 3 years as they are close-ended funds. Category II funds can be open-ended funds or close-ended funds.
The maximum leverage for Category III AIFs is 2 times the NAV of the fund.
This Diwali, we present a portfolio that reflect both sector-specific and stock-specific opportunities. With 2…
Thank you for showing interest in taking a BTST position using our Delivery Plus product.…
Thank you for showing interest in the consultation on trading strategies! Our expert will reach…
Even if you are a new participant in the stock market, the process of buying…
A company’s debt position can be gauged using the interest coverage ratio or ICR. This…
Muhurat Trading, a cherished tradition in the Indian stock market, takes place on Diwali, the…