The term alternative investment funds is a unique investment category that differs from traditional investments like stocks, bonds, and other debt securities. It is a privately pooled fund infused in venture capital, private equity, hedge funds, managed futures, and different types of investments.
The Securities and Exchange Board of India’s Regulation Act, 2012 defines an Alternative Investment Fund (SEBI). AIFs can form as a corporation, a trust, or a Limited Liability Partnership (LLP).
Types of Alternative Investment Funds
SEBI has categorised Alternative Investment funds into three categories:
These funds are invested in small and medium-sized enterprises (SMEs), startups, and new economy businesses with high-growth potential.
Venture Capital Fund (VCF)
Any new entrepreneurial firms that require significant financing during the initial days can approach this fund. VCF can help them in overcoming the financial crunch. These funds invest in startups with high growth prospects.
In this investment, the investor invests in budding startups, and therefore, these investors are called angel investors. They bring their business experience with entrepreneurs. They invest in only those startups that do not receive any funding from VCF. The minimum investment is Rs 25 Lakh.
In this scheme, investment is made in infrastructure companies. E.g., those involved in railway construction, port construction, etc. Investors who are interested in infrastructure development invest their money in these funds.
Social venture funds
Investments in socially responsible businesses are called social venture funds. They are a social change investment, but it has a scope of generating decent returns for investors.
Funds investing in various equity securities and debt securities come under this category. All those funds not described under Categories 1 and 3 by SEBI fall under Category 2.
Private Equity Funds
A private equity fund means investment in unlisted private companies. It is difficult for unlisted companies to raise funds by issuing equity and debt instruments. Usually, these funds come with a lock-in period which ranges from 4 to 7 years.
This investment option is for companies with an excellent corporate governance model and high growth potential. They have a low credit rating or score, which makes them a risky choice for investors.
Fund of funds
As the name suggests, this fund combines various Alternative Investment Funds. The fund’s investment strategy is to invest in a portfolio of other Alternative Investment funds rather than making its own portfolio or deciding what specific sector to invest in.
These Funds aim at short-term returns that fall under this category. They use various complex and diverse trading strategies to achieve their goal of short-term capital appreciation.
Private Investment in Public Equity Fund (PIPE)
This investment scheme involves investment in shares of publicly traded companies. They acquire shares at a discounted price. Investment through PIPE is more convenient as there are fewer paperwork and administration issues.
Hedge funds collect money from authorised investors and institutions. These funds invest in both domestic and international debt and equity markets. They adopt an investment strategy to generate returns for their investors. However, hedge funds are more expensive than any other fund. The fund managers can charge an asset management fee of 2% or more. They can also take 20% of the returns generated as their fees.
Benefits of Investing in Alternative Investment Funds
Here are some of the benefits of investing in AlFs:
High return potential: AIFs generally have a higher return potential than any other investment option. The bog collection of amounts gives the fund managers enough time to prepare flexible strategies to maximise returns.
Low volatility:- As AIFs are not directly related to stock markets. They are less volatile to any market movements, especially when compared with traditional equity investments. It might suit people who do not want to take risks and seek stability.
Diversification:- These funds allowed diversification in the investment portfolio. They act as a support system during any financial crisis or market fluctuations.
These alternative investment funds do provide an alternate way to earn passive income. However, investors also have to do proper research about the platform. Never follow the AIFs based on the interest rate they offer. Before investing in any financial asset, You need to understand what type of investor you are. Also, know your financial goals and how much risk you can take to justify your investment objectives.