In this episode of Dhan ki Baat, Jayanth Ranganathan, Executive Vice President, IIFL Securities, explains the process of investing in Alternate Investment Funds.
An Alternative Investment Fund (AIF) is a privately pooled investment vehicle that can take the form of a company, a trust, body corporate or a Limited Liability Partnership. In India, AIFs are defined under the Regulation 2(1)(b) of Securities Exchange Board of India (Alternative Investment Fund) Regulations 2012 and are not regulated by any regulators like IRDA, PFRDA or RBI.
Alternative Investment Funds are broadly divided into three categories:
The Category I funds invest in either/or:
These funds are not allowed to engage in any leverage except for meeting funding requirements up to 30 days, on not more than 4 times in a financial year with a corpus less than 10%. The tenure of these funds can be between 3 to 10 years. Some examples of funds, which come
under this category are Venture Capital Funds (Angel Funds), SME Funds, Social Venture Funds, Infrastructure Funds. Under the Category I AIF, the fund drawdown happens after every 4-5 years.
The AIFs that do not fall under Category I and Category III fall under this category. For category II AIFs, no specific incentives or concession is given by the government or any other regulator. The funds are prohibited from raising debt other than to meet day to day operational requirements. The tenure for funds of this category can be between 3 to 10 years. Examples of AIFs belonging to Category II are Real Estate Funds, Private Equity Funds and Funds for Distressed Assets. The fund drawdown happens in 4-5 years.
AIFs of Category III make use of diverse or complex trading strategies. This category is primarily for Hedge Funds and can employ leverage through an investment in listed/unlisted derivatives. The funds in this category are traded to make short-term returns with no concession or incentive provided by the government or regulator. The tenure for these funds is minimum 3 years.
While investing in AIFs, do understand that you will have to bear risks like Market Risk and Liquidity Risks.
Mr. Jayanth Ranganathan has been working as Executive Vice President with IIFL Securities since December 2009. Prior to this, he was with Kotak Securities as the Senior Vice President (1997-2009). He has also worked with CITI Bank (1995 – 1997).
Alternative Investment Fund or AIF means any fund incorporated or established in India, which is a privately pooled investment vehicle and collects funds from sophisticated investors, whether Indian or otherwise, for investing it under a defined investment policy benefiting its investors.
An applicant can register as an AIF under the following categories:
In case of an Angel AIF, the minimum number of investors required is 49 with a minimum investment of Rs25 lakh. If the AIF is not an Angel fund, 1,000 sophisticated investors are required with a minimum investment of Rs1 crore each.
Providing for a diversified portfolio, alternative investment funds are a great option to invest. You have the opportunity to invest in a particular strategy with access to wider investment horizon, it is one of the safest ways to invest in non-traditional investment asset classes.
Sponsor is the inidividual who sets up the fund initially. The sponsor is the one who includes a designated partner for an LLC (Limited Liability Company) or a promoter in case of a company. The ‘Sponsor’ is defined in the Regulation 2(1)(w) of the SEBI (Alternative Investment Fund)Regulation, 2012.
The corpus of an AIF is the total of all the amount contributed by the members of the fund by way of a legal written document or any other document of the same manner on a particular date. The corpus of an AIF is defined in the Regulation 2(1)(h) of the SEBI (Alternative Investment Fund) Regulation, 2012.
Yes, every AIF must pay a registration fee. The amount to be paid varies based on the nature and category of the fund:
If the AIF is not an angel fund, each scheme launched should have a corpus of a minimum Rs20cr. In case of an Angel fund, the scheme launched should have a corpus of a minimum of Rs10cr. Without adhering to these rules, no scheme or a fund can be launched by any category AIF.
No, as an AIF is a privately pooled investment vehicle, it is prohibited to raise funds through public subscription. It is permitted to raise funds only through private placements by issuing information memorandum or a placement memorandum. As an AIF, the members must adhere to the rules defined by the deeds and memorandum specified for AIF in India.
Previously, it was believed that only affluent or high net worth individuals can invest in AIFs, but due to increased popularity and good returns in recent times, more and more people are investing in AIFs. If you want to invest, you can consult your financial advisor to determine the asset classes and the strategy you should adopt that can yield good returns.