What is the future of Alternative Investment Funds?
Contributed By: Anant Agarwal
Email ids: anant@simplybiz.in
Introduction
Before we delve into what lies in the future for Alternative Investment Funds, we can understand what it really means. Alternative Investment Funds (AIFs) are basically a pool of funds where the funds are collected from investors to invest it according to a defined investment policy so that the investors can benefit from it. It can be invested in real estate, startups, SMEs, hedge funds, social venture funds and venture capital funds. These are asset classes which are not accessible to all. Although, these are high risk mediums but if invested in smartly they can yield highly impressive returns.
AIFs in eagle eye view
AIFs have three categories. Category I AIFs are majorly for investing in start-ups, SMEs, venture capital funds, social venture funds and infrastructure. This category has a pass-through status exempting it from any tax on running the fund. Category II funds comprise of private equity funds or debt funds. This category too has the pass-through status. Moving on to Category III, this comprises of hedge funds or funds with short term returns. It uses complex strategies to trade. This category does not have the pass-through status and is taxed in various stages, hence it is hardly advised to the investors.
History
AIFs came into existence in the second half of 20th century in the U.S. and since then they have grown into a $7 trillion-plus industry across the world. Venture capitals have been in existence for twenty years in India, AIFs started existing only after SEBI passed its 2012 regulations. Edelweiss Alpha Fund was the first AIF in the country and was launched in June 2013, which was followed by DSP BlackRock Enhanced Equity Fund in May 2014.
Edelweiss’s distressed assets fund is currently raising nearly $1 billion globally. This tells us that AIFs have gained a reliance and popularity among the investors of the world and also that people are more open to investing in such high-risk mediums.
Some Leading AIFs
Monarch AIF – MNCL Capital Compounder Fund was the top gainer among all AIFs in July having a record return of 13%. Other leading AIF performers in 2022 were Nippon India’s Financial Services Scheme at 12.7% and Ampersand Capital Trust’s Growth Opportunities Fund at 11.87%. Sunil Singhania led Abakkus Asset’s funds gained up to 8.5%. Alchemy Capital’s Leaders of Tomorrow also managed a similar return of 8.36%. These are all Category III AIFs, which use strategies in investments that yield high returns.
Reason for growth
Investors who have diversified portfolios including alternate investments apart from the FDs, mutual funds, stocks, gold and silver, and real estate etc., are most likely to get better returns and safety for their investments. In India, some of the alternate investment methods have been in use for decades but they have been accessible only to the extremely rich. These are mostly marketed by wealth management firms to their top-tier clients and demand a very high entry price. Fixed income alternate investments are like a shield against inflation. This is because they have no direct correlation with the market. Some other benefits are generation of passive income, and interest payments which can be an excellent post-retirement benefit. Alternate investment methods are a good way to expand one’s portfolio as they help in avoiding risks, and provide stability to income while generating healthy returns. Mutual funds and PMS (portfolio management services) were not allowed but Category-III AIFs are allowed to use complex trading strategies for investors of sophisticated portfolio and who are willing to invest at least Rs 1 crore in high-reward and high-risk bets.
Present scenario of AIFs
There has been a change in lifestyle and with that a rise in income which can be disposed, and this can be smartly put into investments. Individual small-scale investors now have been presented with new mediums that can help them expand their portfolios. Return on Investment is a major focus area but there are other factors as well, such as safety, liquidity, and a strong mechanism which monitors the investment throughout its lifecycle and the individual investors are now aware of these factors. The market for alternate investments is growing at a great speed in recent years, and according to the latest data from the Securities and Exchange Board of India (SEBI), the investments made in Alternate Investment Funds (AIFs) grew over Rs. 3.11 lakh crore by the end of June 2022. While most of these are linked to Category I and II AIFs, it also signifies that investors are getting more interested in such asset classes and they need to be made more accessible. For the reasons such as high-ticket size that was only affordable for high-net-worth individuals (HNIs), the risks involved, lack of regulation in alternate investments the common public was earlier denied an opportunity to invest in these asset classes. But, with the introduction of technology-driven platforms convenience and transparency has also entered the process and the barriers are falling. While the convenience is technology-driven, the world of investments still needs a high degree of due diligence for each opportunity, along with accurate processes and careful post-investment monitoring. Start-ups have a great opportunity to help deepen the financial instruments and portfolios for investors in India. Together they can be the building blocks for financial strength of the country.
The future of AIFs in India
Currently, opportunities in this space include giving a form of debt to corporates such as a corporate loan, leasing, etc. However, there is a lot of potential for the Indian market, and it can slowly mature to more fields like investing in farmlands, agricultural products, artworks, Non-fungible Tokens (NFTs), collectibles, etc. Growth in technology has also led to innovative products with the use of blockchain/smart contract which helps in the identifying the ownership. This can play a huge role in achieving greater transparency and safety in this space in the future. In the coming times, people will get an opportunity to consume products/services and invest and earn from what they use in their everyday lives. The need for fixed income alternative investments in investors’ portfolio is important. Regulators are also playing a helping hand by bringing clarity to deeply strengthen the financial markets while safeguarding investors. If we look into the minds of investing giants, they believe that AIFs will be the next big boom just like the Mutual Funds. As per the SEBI records, 1070 AIFs are already functioning in India and as more people are getting attracted towards this method, this is bound to see a change in Indian investing practices. After the early 90s, access to public stock markets was driving the wealth for many people in the country. Today, India is facing a similar opportunity, where participating in alternate investments will be the next leap in leading financial stability.
Conclusion
While we have talked about the scenarios of AIFs, we should also look at some challenges, keeping in mind the restrictions which are imposed on fund managers who accept capital from Indian institutions, many fund managers first raise the capital from the offshores and then domestic capital from private institutions, family offices and HNIs. If any capital is to be raised from India, the financial institutions with significant capital should be allowed more flexibility to invest in alternative assets. This will give the much-needed leap to the AIF industry.
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