What are SEBI Alternate Investment Funds

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What are SEBI Alternate Investment Funds

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If you are an investor, you must learn about all the investment options available to you to make the best investment decisions. 

 

SEBI Alternate Investment Funds (AIFs) are a special investment category that differ from traditional investment instruments. In this article, we will explain what are alternate investment funds. 

What does SEBI Alternate Investment Fund India mean?

SEBI Alternate Investment Fund India or simply AIF means any fund which is established or incorporated in India as a privately pooled investment vehicle for collecting funds from sophisticated investors including both Indian and foreign investors for their benefit.

 

AIFs invest in alternative asset classes like private equity, real estate, hedge funds, commodities and derivatives. The Stock and Exchange Board of India (SEBI) is responsible for regulating alternative investment funds in India. AIternate Investment Fund India are designed for institutional investors, high net worth individuals and family offices.

 

Alternative asset management techniques and a wider range of investment options are offered by AIFs, which frequently produce higher returns with less correlation to traditional investments. AIFs can be set up as corporations, limited liability partnerships (LLPs), or trusts. Most AIFs are set up as trusts. Alternate Investment Fund India or AIFs are regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Alternative Investment Funds) Regulations, 2012.

What are AIF Categories in India?

There are three AIF Categories in India as recognized by Stock Exchange Board of India (SEBI) namely Category 1, Category 2 and Category 3. Let’s find out the various types of AIFs in these three AIF categories.

Category 1

Alternate Investment Funds in Category 1 invest in fresh, economically viable companies with significant growth potential, as well as SMEs and start-ups.

Venture Capital Fund (VCF)

New-age companies in their early stages of development that need substantial funding can apply to Virtual Capital Fund (VCF). They can get through the financial hardship with the assistance of the virtual capital fund. The start ups having high growth are these funds’ focus. HNIs who allocate their funds to VCFs do so with a high degree of risk and high return.

Angel Investments

Angel Funds, also referred to as Angel Investors, invest in nascent start-ups. These AIFs bring with them prior experience in business management. These funds make investments in new businesses that VCF does not support. Each angel investor must contribute at least a minimum of Rs 25 lakh. 

Infrastructure Funds

From the name, you can imagine that Infrastructure Funds are those funds that invest in infrastructure companies. These infrastructure companies are those that are involved in railway construction, port construction, highway construction, power plant construction, etc. 

Social Venture Funds

Social venture funds are those funds that make investments in businesses that practice social responsibility. Although they are a type of charitable investment, they have the potential to provide investors with decent profits.  

Category 2

AIFs in Category 2 consist of Private Equity Funds, Debt Funds and Funds of Funds.

Private Equity Funds

The investment vehicles for private equity funds are unlisted private companies or firms. It can be challenging for unlisted companies to raise capital through the issuance of debt and equity instruments. The private investment equity funds typically have a lock-in term which can range from four to seven years.  

Debt Funds

The Debt Funds mainly make investments in debt securities of unlisted companies. Generally, such companies are those that follow a good corporate governance model and come with potential for high growth. Money which is accumulated by debt funds can’t be used to provide loans as per the guidelines established by SEBI.

Fund of Funds

Fund of Funds, or FOF, is an investment technique which involves holding a portfolio of other investment funds instead of investing in bonds, stocks or other securities directly. In other words, a Fund of Fund is an AIF which invests in another AIF.

Category 3

Category 3 includes two types of AIFs namely Private Investment in Public Equity Fund (PIPE) and Hedge Funds. 

Private Investment in Public Equity Fund (PIPE)

Private Investment in Public Equity Fund or simply PIPE is a kind of fund which invests in shares of publicly traded companies. They obtain shares at discount rates. PIPEs save companies time and money and raise funds more quickly as they come with less regulatory requirements and paperwork than public offerings.  

Hedge Funds

Hedge funds are pretty popular funds. They pool money from HNIs, accredited investors and institutions. They fund in domestic as well as international debt and equity markets. In order to generate returns for investors, they make sure of aggressive investment strategies. Hedge funds can be expensive since fund managers charge asset management fees which can range from 2% to 20% and also levy 20% of returns generated as their fees.

Is there Tax on AIF?

Many high networth individuals in India find AIFs as an attractive investment option due to their tax benefits. Category I, and ever since the Finance Act of 2015 came into force, Category II enjoys a pass-through status. This means that the AIF does not have to pay any kind of tax on the earnings under these two categories. 

 

These investors' or unitholders' income under AIF, however, will be liable to tax according to their individual tax slabs. Investors must pay a capital gain tax of 15% on short-term investments or 10% on long-term investments if the fund makes equity instrument investments.

 

In the meanwhile, Category III has no pass-through status and is subject to fund-level taxation. It is subject to the highest income tax rate of 42.7%. Only after this tax is deducted, the unit owners receive their returns.  

What are AIF Benefits?

Several benefits are offered by AIF India such as the following:

Which factors must be considered before investing in AIF?

There are certain factors that investors should consider before they invest in AIFs. First, the investors must evaluate the AIFs investment goals to make sure it is in sync with their investment goals and risk tolerance. It is also important to review the AIF performance over time and assess its track record so that the consistency of returns and risk adjusted returns generated by the AIF can be determined. 

 

Before you invest your funds in AIF make sure you check the experience of the management team and also the fees charged by them. Since AIFs come with higher risk compared to traditional investments, the risk profile of AIF must be assessed before investing. Also, it is important to learn about the AIFs lock-in period and exit options available to investors. AIF that is chosen by investors must be in compliance with SEBI rules.

Conclusion

AIF, or Alternate Investment Fund India, without any doubt are a profitable investment option for investors, especially high networth individuals, that want to grow their funds. But just like with all the investment options and schemes, you must choose AIFs which have a good reputation and are reliable and trustworthy.

Frequently Asked Questions (FAQs) on Alternative Investment Funds

Q1. What do you mean by a debt fund?

A. A debt fund means a fund having the primary goal of being invested in debt or debt securities.

 

Q2. What do you mean by fund of funds?

A. Fund of funds, or FOF, is a pooled investment which invests in other AIFs instead of investing in stocks, bonds or other securities directly. It’s also called multi-manager investment.

 

Q3. Who regulates Alternate Investment Funds or AIFs in India?

A. Alternate Investment Funds India or AIFs are regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Alternative Investment Funds) Regulations, 2012.

 

Disclaimer: This blog is for educational purposes only. The investments quoted here are not recommendatory and the readers are advised to consult with professionals before investing their money in investment schemes/options.

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