Alternative investment funds (AIF) are pooled investment funds catered for affluent investors. These funds take in money from many retail investors and invest the capital in alternative investment instruments, which include instruments other than the conventional equity and debt asset classes. AIFs are high-risk-high reward propositions and are a great diversification tool, which is why it has become increasingly popular among HNIs. As per SEBI data, AIFs saw commitments worth over Rs. 80,000 crore in 2021. In this article, we look at some of the different types of AIFs that you can invest in.
Types of AIFs
SEBI categorizes AIFs into 3 different groups on the basis of their investment activity. These include Category 1, Category 2, and Category 3 AIFs.
Category 1 AIFs
Category 1 AIFs are funds that invest primarily in small enterprises and startups. Some of the subcategories of Category 1 AIFs include the following:
Venture capital funds
Venture capital funds are funds that invest in small early-stage companies that still have a lot of growth potential. They could be sector-specific, funds that invest in companies operating only in a certain industry, or sector agnostic, funds that don’t specialize in any particular industry and invest across sectors. Venture capital funds are great for investors that are looking to invest in startups and companies that can go on to become the next big thing! However, it should be kept in mind that investing in such funds is risky as only a small number of startups actually become successful. The ones that do, however, can reap substantial long-term returns.
Small and Medium Enterprise (SME) funds
As the name only suggests, these funds invest in companies that have been recently started but still have a ton of growth potential. These funds are a little less risky as compared to venture capital funds and as a result, have lower expected returns as well.
Category 2 AIFs
SEBI defines category 2 AIFs as funds that don’t fall under either of the other two categories. Some of the examples of Category 2 AIFs are as under:
Real estate funds
Real estate is probably the most aspired asset class among all Indian investors given the thrill that one gets out of owning a real, tangible asset (even if it is partial ownership). Also, Real estate funds pool in money from
many investors and invest that capital in a range of properties such as commercial real estate, residential real estate, warehouses, factories, etc. These properties are further leased out to corporates which provides a stable income to investors in addition to the potential capital gains that would accrue if the property’s value were to increase.
Fund of funds
Fund of funds is another great option for affluent investors. These funds don’t create their own investment portfolios; rather they invest in other
alternative investment funds. Hence the name fund of funds.
Category 3 AIFs
The funds that belong to this category employ complex trading strategies and leverage to generate higher returns for their investors. These include the following:
Hedge funds
Hedge funds are funds that use complex trading strategies and extensive quantitative models in order to generate superior returns. These funds also make extensive use of leverage or borrowed money. Some funds can borrow up to 200% of their investment corpus, which makes them quite risky. However, since leverage has the potential to generate enormous returns, these funds are very popular among HNIs. Some of the financial instruments that hedge funds invest in include derivatives, currencies, commodities, equity and debt, etc.
Final words
AIFs have their own space when it comes to pooled funds and are increasingly becoming popular among HNIs. If you are looking to invest in AIFs yourself, you can check IndusInd
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