Get To Know The Details Of An AIF
An Alternative Investment Fund, or AIF, is a confidentially pooled investment vehicle developed or incorporated in India that collects assets from expert investors, whether Indian or global, for investing in line with a defined investment policy for the welfare of its investors. AIFs can be formed or incorporated as a corporation, trust, or legal entity (including limited liability partnerships). The SEBI (Mutual Funds) Laws of 1996, the SEBI (Collective Investment Schemes) Laws of 1999, or any other Board regulations governing fund management do not apply to AIF.
The term “Alternative Investment Fund” refers to pooled investment funds that infuse in venture capital, private equity, hedge funds, managed futures, and other types of investments. We can also say that an AIF is a type of investment distinct from traditional investment options such as stocks, bonds, and other debt securities.
The Securities and Exchange Board of India’s Regulation Act, 2012, defines an Alternative Investment Fund (SEBI). AIFs can form a corporation, a trust, or a Limited Liability Partnership (LLP).
Generally, high-net-worth people and organizations engage in Alternative Investment Funds since they need a significant initial investment, unlike Mutual Funds.
Benefits Of AIF:
Customizable
Raising Resources Flexibility
Have A Large Corpus
Skin In The Game
The structure of an AIF can be tailored to fit a specific investing strategy, whether it’s exposure to a single sector or diversification across asset classes.
Expanded Benefits
Uncorrelated With Stock Market
Every investor who has been investing in the stock market for a long time undoubtedly would have had considerable successes and losses. Anyone nearing retirement or who has already retired often feels the pain of watching their portfolio decline. One of the key reasons investors seek alternative investments is to diversify their portfolios.
Many investors are discovering private alternatives to diversify their portfolios and hedge against volatility. Hedging in AIFs is allowed by SEBI, unlike Mutual Funds or PMS. As a result, if the stock market falls sharply, they will have a wall of protection, and their whole investment portfolio will be unaffected. Even in a stable economy, the stock market is notoriously unstable, and alternatives are mostly immune to the public markets’ volatility.
Categories Of AIF
AIFs are divided into 3 different investment structures and requirements:
Category I AIF
- AIFs which are generally perceived to have positive spillover effects on the economy and therefore, SEBI, the Government of India or other regulators may consider providing incentives or concessions shall be classified as Category I AIFs.
- Category I AIFs are funded with strategies to invest in start-up or early-stage ventures or social ventures or SMEs or infrastructure or other sectors or areas that the government or regulators consider as socially or economically desirable.
- Category I AIFs shall not borrow funds directly or indirectly or engage in leverage except for meeting temporary funding requirements for more than thirty days, on not more than four occasions in a year and not more than 10% of its investible funds.
- A Category I AIF of a particular sub-category may invest in the units of the same sub-category of Category I AIFs. However, this investment condition is subject to the further restriction that Category I AIFs are not allowed to invest in the units of Fund of Funds.
- Private Equity (PE) Fund: PE funds invest in private firms that aren’t publicly traded with stakeholders. Because the unlisted and unauthorized private enterprises cannot raise cash with PE funds for help, these organizations provide their clients with a diverse portfolio of shares, lowering the investor’s risk. A defined investment horizon of 4 to 7 years is usual for a PE fund. The company hopes to be able to exit the investment with a decent profit after seven years.
- Venture Capital Funds- Venture Capital Funds invest in high-growth start-ups that are experiencing cash constraints in the early stages of their business and require capital to develop or expand their operations. Because it is difficult for new firms and entrepreneurs to get funds through the financial markets, Venture Capital Funds have become the most popular option for their funding needs. They invest in various businesses based on their company characteristics, asset size, and product development stage. Unlike mutual funds and hedge funds, venture capital funds concentrate on early-stage investments. Each investor receives a proportional share in the firm that the VCF has invested in, based on their investment.
- In September 2013, SEBI introduced ‘Angel Investment Funds as a sub-class of the Venture Capital Fund. This is a sort of Venture Capital Fund in which fund managers combine money from several “angel” investors to invest in early-stage firms. Investors receive dividends when new enterprises become profitable. Units are distributed to angel investors in the case of Angel Funds. An “angel investor” is a person who wishes to invest in an angel fund and adds business management knowledge to the table, therefore assisting the company in its growth. Because of their growing uncertainties, these investors usually invest in companies not sponsored by conventional venture capital funds.
- SME Funds: SME (small and medium enterprise) funds as their name suggests invest in listed/unlisted micro, small and medium enterprises. These companies tend to meet their debt capital requirements through NBFCs. However, there exists a vacuum when it comes to equity funding for these companies. SME funds help bridge this gap by providing equity financing to these companies. As per SEBI regulations, SME funds fall under category 1 AIF (alternative investment fund). To be classified as an SME AIF, a minimum of 75% of the total assets of an AIF needs to be invested in listed or proposed-to-be-listed or unlisted SME companies.
- Social Ventures Funds: Socially responsible investment has spawned the Social Venture Fund (SVF), which invests in firms with a strong social consciousness and a desire to impact society positively. These businesses focus on producing money while addressing environmental and social challenges. Even though it is a philanthropic investment, one may expect a return because the companies will still generate money.
- Infrastructure Funds: The fund invests in public assets like road and rail infrastructure, airports, and communication assets, among other things. Investors that are positive about future infrastructure growth can participate in the fund since the infrastructure industry has high entry barriers and little competition. Infrastructure Fund investors might expect a mix of capital growth and dividend income due to their investment. When an Infrastructure Fund invests in socially acceptable and practical initiatives, the government may offer tax incentives.
Category II AIF
- Category II AIFs are funds which cannot be categorized as Category I AIFs or Category III AIFs. These funds do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the AIF Regulations.
- AIFs such as private equity funds or debt funds for which no specific incentives or concessions are given by the Government of India or any other regulator are included in the Category II AIF classification.
- Category II AIFs shall invest primarily in unlisted investee companies or in units of other AIFs as may be specified in the placement memorandum.
- Category II AIFs shall not borrow funds directly or indirectly or engage in leverage except for meeting temporary funding requirements for more than thirty days, on not more than four occasions in a year and not more than 10% of its investible funds.
- Category II AIFs may engage in hedging subject to such guidelines that may be prescribed by SEBI.
- Category II AIFs shall be exempt from Regulations 3 and 3A of the Insider Trading Regulations in respect of investments in companies listed on SME exchange or SME segment of an exchange pursuant to due diligence of such companies. This is subject to the further conditions that the AIF must disclose any acquisition / dealing within 2 days to the stock exchanges where the investee company is listed and such investment will be locked in for a period of 1 year from the date of investment.
Category III AIF
- Category III AIFs are funds which employ complex or diverse trading strategies and may employ leverage including through investment in listed or unlisted derivatives.
- AIFs such as hedge funds or funds which trade intending to make short-term returns or such other funds which are open-ended and for which no specific incentives or concessions are given by the Government of India or any other regulator are included in the Category III classification.
- Category III AIFs may invest in the units of Category I, Category II and Category III AIFs. This is subject to the restriction that Category III AIFs cannot invest in the units of Fund of Funds.
- Category III AIFs engage in leverage or borrowing subject to consent from investors in the fund and subject to a maximum limit as may be specified by SEBI.