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AIF Products
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AIF, short for Alternative Investment Funds, has become a very intriguing concept to explore as it caters to the need of investors by giving them an array of investment options. Typically, investors invest in stocks or bonds or some other commodities such as gold or crude oil but with so many different products, AIF products give them a chance to diversify their portfolio and have a better shot at making profits.
In this article, we are going to look at its products and how do they widen the investment horizon for the investors.
AIF Products in India
Like we said before, there is a wide array of AIF Products that diversify the portfolio of the investors and we are going to look at them one by one.
These products have their own specialities along with several benefits and disadvantages. All the AIF products have different taxation rules as some are taxed at the fund level while some are taxed at individual levels. Also, the AIF minimum investment for these funds varies.
Also, these funds fall under the category of different types of alternative investment fund available in India. Looking at the numbers, here we are discussing the 9 major products that fall under Alternative Investment Funds.
Out of those 9, seven products are close-ended, which means they come with a lock-in period while the remaining two can either be closed or open-ended.
Let’s discuss in detail, what are these products and what benefits you can reap by investing in any one or more among them.
Venture Capital Funds
This is an AIF product that involves investing in the equity ownership of start-up companies. Based on the company profile and business plans, the AIF recognizes a startup that has growth potential and decides to invest in it with a goal of making profits after the lock-in period of 3 years.
Since it focuses on investing the money of investors in small and startup companies, it offers high risk, high returns.
When it comes to the difference of Ventura Capital Funds from the mutual fund and hedge fund, they differ in only one aspect of an early stage of investment and pool the investors’ fund in multiple young startups with the belief that some of them attain good growth and offer a high return in the long term.
Debt Funds
This AIF product type aligns a lot with the VCF since it includes investments in the debt securities of listed as well as unlisted companies. Sometimes when companies struggle to raise funds, they release bonds (debt securities) but due to their low credit score, they find it difficult to find buyers.
Debt funds then help these companies raise their capital by purchasing their debt securities with an aim to make high returns in investment. The investor in turn are benefit from its low-cost structure, stable returns, and high liquidity.
This fund is highly recommended to those who are looking for a stable income and have a low-risk appetite.
Hedge Funds
Hedge funds are the riskiest AIF product that invests in regular securities and listed as well as unlisted derivatives with borrowed money. It aims to make leverage out of investment in sophisticated assets that aren’t understood by too many people.
In simple terms, it involves investing in complex investment options with good portfolio diversification and at the same time involves high risk. But with the high risk, these products tend to offer a high return to investors.
It is suitable for investors who want to get into the investment with a large amount of money and has the potential to take high risk.
Social Venture Fund
This is an AIF product where investments are made in those companies that aim to bring social and environmental change. The objective of making profits still remains intact but the investments contribute to a larger social and environmental welfare at the same time.
Under this AIF product, the investments are made in the securities of trusts, societies, and other companies that work for social issues.
Infrastructure Fund
The investments are made in public infrastructures such as Railways, Roadways, communication assets, and more under this AIF product. This product helps the government raise funds for economic development and in this return, it gets several tax benefits from the government.
This is one AIF product that is completely free from the stock market volatility and the profits are made out of the increase in the price of the assets that this fund invests in.
Since the investment is aligned primarily on the government-based projects it is less volatile and thus involves low-risk investment products.
SME Fund
SME stands for small to medium-sized enterprises which get the financial boost from the investments that are made into their securities. Through this fund, SME companies are able to raise their equity funding and thus move towards growth and profit.
Now when it comes to categorizing these funds, it falls under AIF Type I and thus requires a minimum investment of Rs 1 crore with the lock-in period of 3 years. The investor can expect returns from these companies when they are listed or when the company attains aif remarginal growth after raising the fund.
Private Equity Funds
This AIF product identifies the unlisted private companies with the potential of huge growth and invests in their equities with an aim to make big AIF returns. It gives the unlisted companies a great opportunity to raise some capital since it is not possible for them to raise funds as they are not listed on any exchange.
When it comes to the specific product type, this fund basically invests in the companies equity and debt funds managed by LLP. It is suitable for those who are looking forward to a long period of investment that ranges from 5 to 10 years.
Fund of Funds
It is the type of mutual fund, where the investor instead of analyzing different mutual funds for investment, invest in the smaller units of different available mutual funds not limited to ETFs and index funds and reap the benefit of aggregated return percentage of each mutual fund.
So, it is one of the best options for those who are looking for asset allocation and portfolio diversification for better returns.
PIPE
PIPE stands for Private Investment in Public Equity and under this AIF product, the pooled fund of private investors is invested in purchasing the equity of companies that have already been traded on a stock exchange at a discounted rate.
But why would a publicly-traded company sell its shares at a discounted rate?
This is because PIPE is a lot more convenient way to get funding through the selling of shares. It requires very little paperwork which is why the whole procedure is completed in almost no time. Henceforth, the companies in dire need of capital prefer PIPE over the secondary issue of shares since PIPE helps them raise capital at a quicker pace while the investors can purchase the shares at a discount.
It serves as a win-win for both the companies as well as the investors.
AIF Product Benefits
Investing in these products with the best AIF in India serves multiple benefits. Let’s look at some of them one by one.
- Independent of Market Volatility: Since a lot of the investments are made in the non-traditional assets, as well as, the equity of unlisted companies, they are free of the stock market volatility and even though it takes out the potential returns associated with the market, it also eliminates the market risks.
- Contribution to the Welfare of Society: AIF products such as Social Venture funds and Infrastructure funds help largely in the welfare of society, environment, and public infrastructure since the investments are aimed at these sectors.
- Professional Fund managers: Instead of making their own decisions, the investors get a cushion of experienced and knowledgeable professional fund managers who then plan on how to book maximum profits from these investments.
Conclusion
An AIF is defined as a pooled fund of private investors with a common objective. The same can be said about AIF products as all the different products serve the same purpose of maximizing your profits. The variety of these products gives you an option to decide what is suitable for you depending on your investment style.
For example, if you are someone with a high-risk appetite then you can opt for a Hedge fund or a debt fund where the returns are very high. On the other hand, investing in infrastructure funds or Social Venture funds, or Fund of funds is less risky and suits the investors with a low-risk capacity.
You, as an investor can measure several pros and cons and then decide to pick your preferred AIF product to invest in.
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