Are you planning to secure a future for your children's education? Or investing in a family member's marriage? People often invest in stocks, bonds, cash and even gold. These are traditional investments that are common among most individuals planning a secure future. It falls under the category of "conventional investment", which has been part of the banking system for a long time now. But what about the ones who want to diversify their portfolio and look for a more rewarding investment plan?
With rising financial awareness, new-class investors and high-net-worth individuals are exploring alternative investment funds. They are a financial vehicle that deviates from traditional routes and offers investment in assets like private equity, real estate, hedge funds, etc. Keep reading to dive deep into the AIF meaning, its types and crucial government regulations.

What is an Alternative Investment Fund?

An Alternative Investment includes assets that aren't cash, stocks or bonds. They are privately pooled investment components that can't be easily liquidated in a short time period. It pools capital from select investors and invests in non-conventional assets, including venture capital, private equity, cryptocurrency, real estate, collectables and others. Due to the risk involved and complex nature, they are mostly popular among investors with high-risk capacity. However, they offer higher returns and great opportunities for portfolio diversification. For industry players with a minimum investment requirement of ₹1 crore, AIF can bring a brighter future.

What are the Different Types of Alternative Investment Funds?

Based on specific investment strategies, there are various Alternative Investment Funds that investors can opt for. Here are the common types:

1. Venture Capital Funds (VCFs):

   When looking for what is AIF for a startup business, Venture Capital Funds are the best choice. They primarily invest in young companies with great potential but lack access to capital. These funds assist entrepreneurs in their early stages of business, helping to scale and enhance their operations/growth. It is a high-risk investment with significant returns on portfolio companies.

2. Private Equity:

   A private equity AIF invests in a company that is privately held and not available on stock exchanges. Mostly, these businesses have good potential as well but require capital to enter into new markets, reform operations and scale up. Private equity can offer investors higher returns as they have a long investment term with a 4-7 year lock-in period. They are much more rewarding than traditional instruments; however, there is no liquidity aspect that requires a strong risk appetite.

3. Private Debt:

   Private debt funds fall under the regulatory classification of Category II. This alternative investment fund means putting money into debentures or bonds listed by unlisted companies. Private debts are invested by businesses that may have a robust growth plan but weaker credit ratings to borrow from banks, offering an opportunity to build the financial gap. It has better returns and more risk if the company fails to meet the required obligations. SEBI does not allow AIFs to issue loans directly; they can invest in structured debt instruments.

4. Real Estate:

   Real estate can offer a great instrument for seasoned investors. They are financial products that can include investing in physical properties, real estate crowdfunding platforms, property-related securities, and even real estate mutual funds. Real properties can include land, farmland, timberland, etc. Therefore, this form of alternative investment funds means investing in both actual properties and buying funds that invest in real estate. The appreciation value here increases over time. Meanwhile, assets like apartment buildings or shopping stores can bring a steady income. It is considered the most common and biggest asset class.

5. Hedge Funds:

   Want to learn what is alternative investment fund that can be invested in a global market? Hedge funds are one of them, allowing investors to have a dynamic market hold. It helps invest across both domestic and international markets, involving high-risk strategies to gain maximum returns. One of the alternative investment funds that trades in relatively liquid assets and is equipped with various risky strategies like long-short equity, event-driven plays, macro bets, etc.

6. Commodities:

   Commodities are a popular and highly liquid alternative investment option that involves natural resources and raw materials such as agricultural products, precious metals, oil, natural gas, etc. These commodities serve as a hedge against inflation and are not sensitive to equity market fluctuations. Investors can invest in tangible goods that have a universal value and real-world uses, as they have an ongoing demand and help gain potential returns. They aren't new investment tools in the market; they have been in trade for years. Lately, commodities have become increasingly popular, especially in international countries.

SEBI Regulations on AIF

Here are some regulations and compliances for investors on specific alternative investment funds:

• Investment Mandate

  VCFs, Angel funds, etc, are Category I AIFs that are expected to invest capital into sectors with economic and social development. It includes startups, SMEs, social ventures and others.

• Allocation Requirement:

  SEBI allows 75% of investable corpus to be deployed in specific sectors that fall under Category I AIF. These sectors are mainly in unlisted equity or equity-related instruments.

• Investment Limits:

  Category II alternative investment funds, like private equity, debt funds, real estate, etc., can invest in various instruments. There is 25% of investable funds in a single investee company, which can extend up to 50% for large-value funds.

• Risk Management and Leverage:

  SEBI restricts borrowing to short-term cash flow for investment in AIFs under Category II. Meanwhile, investment leverage is completely prohibited, and one can utilise derivatives for hedging purposes only.

The Final Word

For the investors who have been constantly searching for answers to what is AIF, this guide brings you a clear picture. If you are someone with bold financial decisions, it's time to drift away from conventional strategies. AIF, meaning Alternative Investment Funds, transcends the usual means of storing savings, offering a fulfilling future prospect for investors willing to bet on their money. Since the returns are relatively higher you have a great opportunity to meet your financial goals and diversify your portfolio at the same times!

Sources:

• https://www.investopedia.com/terms/a/alternative_investment.asp

• https://online.hbs.edu/blog/post/types-of-alternative-investments

• https://cleartax.in/s/alternate-investment-funds

• https://www.forbes.com/advisor/investing/alternative-investments/

Security investments are subject to market risk and there is no assurance or guaranteed that the investment objective will be achieved. This document is for knowledge purpose only.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.