Alternative Investments Funds Compare

Additional Useful Information

• Suitable for investors who have a high-risk tolerance and have lots of excess capital. It is also recommended that only experienced investors invest in AIFs.

• The types of investors generally who invest in AIFs are institutional investors, high net worth individuals, and family offices.

• The minimum investment required to invest in AIFs is ₹1,00,00,000.

• There is generally a lock in period of 3 to 5 years.

• AIFs tend to have a dual fee structure.
• The first component - Management fees where a fixed fee per year is charged as management fee. The fee is around 2%, charged regardless of any profit generated.
• The second component - Performance fee, which is around 20%. Private equity funds companies claim a certain percentage of the profit as their own. For example, if the performance fee is 20% and the overall profit of the investor is ₹ 1,00,000, Private equity funds claim and keep 20% i.e., ₹ 20,000. The remaining ₹ 80,000 is returned to the investor.

• Alternative Investments in India are typically complex investments and cannot be directly invested in. These Alternative investments can be invested through AIFs only.

Returns *

• AIFs Investments have the potential to generate higher returns as compared to other investment options. However, they have a larger downside at the same time.

• There are two components of returns in AIFs –
• The first component - Capital Appreciation or ‘Capital Gain’. An increase in ‘NAV’ from the ‘NAV’ that investors purchased the fund at, means a positive return. However, if the ‘NAV’ decreases, it could give a negative return.
• The second component - Dividends and distributions.

• The returns depend on the category and type of fund, for instance Venture capital provides higher returns than real estate.

Risk Level

• AIFs are very high-risk investments.

• Private equity funds are subject to liquidity risk since the up-front capital is high and the lock in periods are long.

• Manager level risk is also a risk that applies to AIFs. Managers are the key decision makers and are instrumental in identifying good opportunities.

• The funds are exposed to leveraged risk. Some funds in the category 1 and 3 use leverage to scale the profit, which at the same time increase the risk.

• It is always worth doing thorough due diligence on a particular AIF under consideration.

Liquidity

• AIFs are relatively illiquid because most private equity funds come with a lock in period.

• Early redemption comes with heavy costs to the investors.

Interesting Facts

• AIFs have relatively fewer disclosure requirements as compared to other traditional investments.

• Alternative investment funds are regulated by SEBI; however, they have less regulations compared to mutual funds or any other management regulations.

• AIFs in general do not have a perfect correlation with equity and debt investments. This is why exposure to AIFs results in good diversification benefits.

• It is important to review the key decision makers involved in the fund. This is because they are in charge of identifying investment opportunities and it is always important to carry out due diligence on the historical performance and characteristics of the management team.

• AIFs invest in securities and/or funds that are not accessible or open to retail investors directly.

• Employees, fund managers and/or directors of the AIF can invest a minimum of ₹25,00,000 as compared to the ₹1,00,00,000 required as minimum investment by other institutional investors. The minimum fund size should be ₹ 20 crore.

Tax Implications

• AIF Category 1 and 2 are taxed at the individual level, which means taxes on any profits made are to be paid by the investors. Taxes are paid according to the type of gains made by the investor.
• These gains include short term and long-term capital gains. Tax rates vary for different gains. If the income or profits are in the name of a company, the income is considered as business income, and it is taxed as per the business tax slab of the company. This depends on the type of company (LLC, partnership, etc.).

• AIF Category 3 are taxed at the fund level, which means taxes on any profits made are to be paid by the fund itself, not the investors.

• Any dividends and distributions are paid as per the tax slabs of the individual investors.

Where To Invest

• Invest in Alternative Investment Fund (AIF) Online (dbs.com)

• Invest In Alternate Investment Fund (AIF) With Motilal Oswal Mutual Fund (motilaloswalmf.com)