Alternative Investment Funds are defined as privately pooled investment funds. They are categorized by SEBI as Category I AIF, Category II AIF, and Category III AIF. Assets under management can include start-ups, SME funds, infrastructure funds, private equity funds, or even hedge funds that may be trading in listed or unlisted derivatives depending on the type of fund.
Features and Benefits of Alternative Investment Funds
As the name suggests Alternative Investment Funds in India are non-traditional investments. This means the assets under such funds are not correlated to the stock market. These funds are primarily for high-net-worth investors looking for diversification and better potential returns while absorbing the accompanying risk. Some of the benefits and features of Alternative Investment Funds are:
Diversification is one of the key features of these funds. They have considerable freedom to decide where to invest unlike most funds which are regulated by SEBI.
Non-traditional investment options are available to these funds which are not generally open to all investors.
Potential returns are a factor considering the type of non-traditional assets these funds invest in.
The minimum investment amount is INR 1 Crore depending on the type of AIF.
Types of Alternative Investment Funds
Alternative Investment Funds in India are categorized into 3 types per SEBI rules
Category I are funds with strategies to invest in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable.These invest in Startups, SME’s, Social ventures, Infrastructure funds, Angel funds, or Venture Capital Funds
Category II 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 Regulations. Private Equity debt funds that invest in real estate funds, funds for distressed assets, funds of funds, etc.
Category III are type of fund that invests in Hedge funds or funds which trade with the purpose of making short-term returns and can employ complex and diverse trading strategies, like using arbitrage, derivatives trading, and open-ended funds.
How it’s work ?
Alternative Investment Funds raise money to form an investment fund pool that invests in non-traditional assets classes. These are asset classes that investors may not have direct access through regular methods like Mutual Funds or Debt. Money can be raised from any investor of Indian, foreign, or non-resident origin for such funds.
Who should invest
These types of funds are primarily aimed at High-Net-worth individuals who are already accustomed and well versed with the investing world. While the potential for returns these funds offer is high, so are the risks.
So, Indian residents, Non-Residents (NRI’s), and Foreign Nationals can invest in Alternative Investment Funds.
Investors who are willing to meet the below criteria should invest in Alternative Investment Funds:
- Have a large amount to invest in one instrument
- Ability to withstand the risk
- Are acceptable with lock-in periods
- Are acceptable with lower regulatory control/ interventions
Taxability on Alternative Investment Fund
Alternative Investment Funds are taxed according to their category.
Category 1 and 2 AIFs are accorded pass-through status. This means that the income on the fund is not taxed, only the income or profit booked by the investor is taxed. The tax is as per the income slab of the investor. Capital gains the fund makes on the stocks are taxed depending on the holding period that is short term or long term.
Category 3 AIFs are not granted pass-through status. The income generated by such funds is taxed as high as 42.7% depending on various factors of the gains received. Factors can include, dividend, nature of gain, short term or long term, business income among others.
Frequently Asked Questions (FAQs):
How Does an Alternative Investment Fund (AIF) Work?
Alternative Investment Funds are a privately pooled investment vehicles that collect funds from sophisticated investors, whether Indian or foreign, investing in non-traditional asset classes such as angel funds, private equity, hedge funds, venture capital, managed futures, etc.
How do I Start Investing in an Alternative Investment Fund?
How do I Start Investing in an Alternative Investment Fund?
Who can Invest in an Alternative Investment Fund?
Indian residents, non-residents (NRI’s), and foreign nationals can invest in Alternative Investment Funds.
What is the Enrollment Charge to be Paid for an Alternative Investment Fund?
The enrollment charge to be paid for an Alternative fund depends on its type. All three categories have an application fee of Rs. 1 lakh. Registration fees are Rs. 5 lakh, Rs. 10 lakhs, and Rs.15 lakh for Category I, II, III respectively.
What is the Upper Limit for Investors Under Alternative Investment Fund (AIF)?
There is no upper limit for investors under Alternative Investment Funds. Minimum limits are Rs. 1 Cr depending on the type of the fund. Also, no fund must have more than 1,000 investors.
