Alternative Investment Funds vs Mutual Funds

You must have heard a lot about pooled investment funds like Mutual funds or Alternative Investment funds through different sources but as a beginner, understanding their concept first and then major points of alternative investment funds vs mutual funds must sound like a frenetic task, no? 

Both of them function on the same concept of investing money collected through a pooled fund where the money comes from different private investors with a common goal. 

However, there are some significant differences between the two that you must be aware of before planning your investment. 

In this article, we explain the differences between Alternative Investment Funds vs Mutual Funds and try to make things simpler for you. 

Alternative Investment Funds 

Alternative investment funds (AIF) are basically pooled investment funds that are invested in a wide range of assets such as venture capital, private equity, hedge funds, managed futures etc by professional fund managers in a strategic way to make profits.

It’s an unconventional investment where individuals don’t just invest in shares or debt securities.

In other words, in Alternative Investment funds, a fund manager collects funds from different individuals and invests the fund in the asset classes mentioned above to make sure the individual earns the maximum profit on investments. 

There are different types of Alternative Investment Fund that again provides you with a wide range of investment option and way to maximize return on investment. 

What are Mutual Funds? 

Mutual funds are a similar kind of investment funds but here the professional fund managers invest the collected funds in stock and debt securities only in a systematic and planned way so that investors can make maximum profit. 

In other words, when a group of individuals shares a common investment goal, the individuals of the group decide to surrender their funds to a professional fund manager who then invests the pooled funds into stocks or debt securities to maximize the profit. 

 

Who Can Invest in Alternative Investment Funds? 

Like the basic definitions of these two entities are different, the kind of investors who invest in either of Alternative Investment Funds vs Mutual Funds are different too. Let’s understand that now.

According to the SEBI rules, an investor must fulfill certain criteria if he/she wants to invest in alternative investment funds. 

• The investor can be an Indian citizen or a Non-resident Indian or a foreigner but the foreigner is only allowed to invest in equity. 
• For an individual, the minimum investment limit is set at ₹ 1 crore.
• For an individual who is an employee, manager, or director of the AIF, this limit is ₹ 25 lakh. 
• For the entire group of investors to be eligible to invest in a particular scheme, the minimum corpus must be ₹ 20 crores. However, for the Angel fund, it is ₹ 10 crore. 
• For each scheme, the maximum limit of investors is set at 1000. 

Who Can Invest in Mutual Funds? 

Investing in mutual funds is relatively easier. An investor must fulfil these criteria in order to invest in mutual funds according to SEBI. 

• The individual can be an Indian citizen or a Non-resident Indian or a foreigner but foreign investors can not avail of SIPs or STPs.
• There are different minimum limits for different kinds of Mutual funds but the lowest amount an individual can invest in mutual funds is ₹ 500. 
• For the entire group of investors to be eligible to invest in a particular scheme, the minimum corpus must be ₹ 1 crore. 

Are “Mutual Funds” Alternative Investment? 

No, even though both mutual funds and alternative investment funds serve the same purpose of investing pooled funds of private investors, they are not the same. There are some major differences between them which we have listed in the table below. 

 

Should I invest in AIF or Mutual funds? 

Now, most of the investors stay confused in choosing the right investment option when it comes to Alternative Investment Funds vs Mutual Funds.

If even after understanding the difference you are still not able to make a decision, then here are some more parameters that make it easier for you to invest in the right option. 

1. Diversification

Both AIF and Mutual Fund investments allow diversification of portfolio which minimizes share market risk and maximizes the potential profit since it doesn’t put all your eggs in one basket. Both the fund managers manage your portfolio so that you book maximum returns. 

2. High ROI vs Low risk

The investments in AIF products are not related to the stock market which means the returns are independent of the volatility of the stock market. This means investments have low risk in comparison.

Whereas, in Mutual funds, the returns directly depend on the stock market. This makes it riskier but it also gives the investors a chance to book greater profit (Higher Returns on Investments) if the market goes up. 

3. Direct ownership and Tax Benefits

Both AIF & MF investments give you direct ownership of the investment. Both Alternative Investment Funds and Mutual Funds in India give you tax benefits as well which creates savings for individual taxpayers. 

4. Lock-in period

Mutual funds are of three types – Interval funds, Open-ended and Close-ended. Out of these three, Close-ended funds have a lock-in period of 3 to 5 years generally. During this period, an investor can not redeem their returns to avoid volatility in a liquid market. ETSS, which is an open-ended MF also comes with a lock-in period of 3 years. 

The remaining other Mutual Funds don’t come with any lock-in period. 

Most Alternative investment funds, on the other hand, come up with a lock-in period of 3 years. 

5. Easy investment vs Difficult investment

Mutual funds investment is relatively easier since the minimum limit set for investment is as low as ₹ 500 which is quite affordable for any retail investor. While in AIF investment, the minimum investment limit is set at ₹ 1 crore which only suits High Net-worth Individuals. 

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Conclusion

India’s growing economy is not a secret and with a growing economy come multiple investment options. However, India also has a huge wealth gap. This is when the different types of investment options come into the picture as they allow individuals to invest regardless of the money they have. 

Mutual funds allow retail investors to give a shot at investing while Alternative Investment funds serve the purpose of increasing the wealth of financially sound individuals.

Between Alternative Investment Funds vs Mutual Funds, which one you should go for should depend on the investment capital you have as well as your investment goals and future plans?

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