How many Types of Alternative Investment Funds exist in India?

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How many Types of Alternative Investment Funds exist in India?

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Alternative Investment Funds have become a popular investment option in India. By investing in AIFs, investors can earn good profit on the amount invested. 

 

There are many types of alternative investment funds in India. If you want to invest in an alternate investment fund, learning about how many types of alternative investment funds exist in India will be helpful for you.

Alternative Investment Funds: Introduction

An Alternative Investment Fund refers to a privately pooled investment vehicle that collects funds from sophisticated investors, including Indian as well as foreign investors, and then invests the collected funds in alternative asset classes like hedge funds, real estate, derivatives, commodities, venture capital and private equity for the benefit of these investors.

 

Alternate Investment Funds are generally invested in by individuals with high networth and institutions as the investment amount in AIFs is significantly higher compared to other investment vehicles. As of 12th July, there are 1364 AIF registered with SEBI in India.

SEBI Alternative Investment Funds Regulations

Alternative Investment Funds or AIFs in India are regulated by the Securities and Exchange Board of India under SEBI Alternative Investment Funds Regulations 2012. 

 

According to these regulations, AIFs in India can be set up as a body corporate, trust, company or a limited liability partnership. Generally, SEBI registered AIF are trusts. 

 

Now, let’s find out about all the types of Alternative Investment Funds which exist in India.

 

Types of Alternative Investment Funds in India

According to SEBI, there are three categories of Alternative Investment Funds in India and many types of AIFs India fall under these categories

These three categories of Alternative Investments Funds according to SEBI are:

Now, let’s discuss all these categories of AIF one by one, and also learn about the types of AIFs falling under each AIF category.

Category I AIF

Alternate Investment Funds falling under Category I AIF make investment in small and medium enterprises (SMEs), startups and new entrepreneurial businesses having the potential to attain high growth. 

 

Category I AIF funds are promoted by the Government and it may also incentivise investments in these funds since they have a multiplier effect on the economy when it comes to economic growth and job creation. For startups which are in dire need of capital, Category I AIFs are like a life jacket.

 

Now, let’s check out the types of alternative investment funds falling under Category I AIF.

Venture Capital Fund

Venture Capital Funds are the types of AIF which make investment in startups showcasing high growth potential but are facing lack of investors during their initial phase and require funds in order to establish their business or expand their operations.

 

It can be tough for new businesses and rising entrepreneurs to raise funds. However, with the help of Venture Capital Funds, the fresh businesses and budding entrepreneurs can meet their financial requirements. 

 

Venture Capital Fund AIF pools money from the investors desirous of making equity investments in ventures. It makes investments in multiple startups based on their business profiles, assets’ size and product development stage. Venture capital funds primarily focus on early stage investment in contrast to mutual funds and hedge funds. 

 

Every investor receives a share of the VCF invested business which is in proportion to his respective investment. High net worth individuals, including foreign investors, who are interested in high risk high return investments generally invest in Venture Capital Funds.

Angel Fund

Angel fund is actually a type of Venture Capital Fund. In case of an angel fund, the funds are pooled from multiple investors known as angel investors. Then the collected funds are invested in rising startups for their development. 

 

Angel investors are those individuals who invest in an angel fund and they come with a lot of experience pertaining to business management and so, they can guide the startups. The investors receive dividends as the new businesses become more profitable but in case of angel investors, units are issued. Businesses which are usually not funded by established venture capital funds due to their uncertainty in terms of growth are funded by angel investors generally.

Social Venture Fund

Social venture funds invest in enterprises or businesses which work for a social cause or have a positive impact on the society or environment. They are also known as social impact funds. 

 

Social Venture Funds help bring about a change in society by investing in projects in developing nations.  Although investment in a social venture fund is philanthropic in nature, it can still provide returns to the investors. Investments in social venture funds benefit all the parties involved, including investors, businesses and society at large as these funds bring best managerial practices, technologies and a wealth of expertise to the table.

Infrastructure Fund

Infrastructure funds make investments for developing public infrastructures like road and railways infrastructure, airports and so forth. The infrastructure sector has high barriers to entry and considerably low competition, so investors who are optimistic about infrastructure development in the near future can choose to invest in infrastructure funds. The investors can get returns from infrastructure funds in two forms i.e., dividend income and capital appreciation. In certain cases, the government may provide tax benefits on investments under this AIF if it invests in socially feasible and desirable projects.

Category II AIF

Category II AIF funds are those funds which do not fall in Category I AIF or Category III AIF of SEBI. Category III AIF funds invest in various debt and equity securities. The government does not provide any incentives or concessions for investments made under Category III AIF funds.

 

Now, let’s take a glimpse of the types of alternative investment funds falling under Category II AIF.

Private Equity Fund

Private Equity Funds basically makes equity investments in companies which are unlisted private companies. PE funds help such companies to raise capital and in return, they take a share of ownership of such companies. As unlisted private companies are unable to gain capital by issuing equity or debt instruments, they often seek private equity funds.  

 

PE funds enable their investors to have a diversified portfolio of equities which helps to lower investor risk. Generally, PE funds have a lock-in period of 4-7 years. After 7 years, the investors can hope to exit investment with a good return.

Fund of Fund

Fund of Funds are those AIFs which make use of an investment strategy which involves holding a portfolio of other investment funds instead of making a direct investment in stocks, bonds and other various securities. In other words, a Fund of Fund is an AIF which invests in another AIF.

Debt Fund

Debt funds are AIFs which primarily invest in debt or debt securities of listed as well as unlisted companies. Companies with low credit rating typically release high yield debt securities accompanied with high risk. Therefore, companies which showcase high growth potential and adopt good corporate practices but are facing financial difficulties can be a good investment option for debt fund investors. SEBI has clarified that the amount contributed by investors in a debt fund cannot be utilized for the purpose of giving loans as the AIF is a privately pooled investment vehicle.

Category III AIF

Category III AIF includes funds with the goal of short-term capital appreciation. These AIFs make use of various complex and diverse trading techniques to achieve their goal. Just like Category III AIF funds, the government doesn’t provide any incentive or concession for investment in alternative investment funds falling under Category III AIF.

 

Check out the AIFs which come under Category III AIF below.

Hedge Fund

Hedge funds are Alternative Investment Funds SEBI which pool capital from high networth institutional investors and invest the capital in domestic and international markets with the goal of generating high returns. The hedge fund managers make use of various investment strategies, including leverage (borrowed money) and the trading of non-traditional assets, to achieve high returns. Compared to mutual funds, hedge funds are less regulated. 

Private Investment in Public Equity Fund (PIPE)

Private Investment in Public Equity Fund, or simply PIPE Fund, is a privately managed pool of privately sourced funds set aside for public equity investments. PIPE refers to purchasing of shares of publicly trade stocks at a price below the current market value i.e., at a discounted price. This allows investors to purchase a company’s stake while the company receives capital for expanding its business.

Conclusion

For investors who want to have a diverse portfolio of various investments, addition of alternative investment funds can be a good option. As discussed in this blog article, there are various types of alternative investment funds in India and the investors can decide the funds they wish to invest in. However, only seasoned investors should opt for AIFs since they are complex in nature. 

 

AIF Alternative Investment Fund are particularly beneficial for high net worth individuals and institutional investors. For small investors with limited funds, investing in an AIF might not be an option as AIFs require a large amount of capital. Although AIFs can offer high returns compared to other investment vehicles, the risk associated with AIFs is higher as well. Before making any investment decision, it is important to consider all the risks carefully and do extensive market research.

 

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