What is an Alternative Investment Fund (AIF)?
Alternative Investment Fund comprises pooled investment funds which invest in venture capital, private equity, hedge funds, managed futures, etc. In simpler terms, an AIF refers to an investment which differs from conventional investment avenues such as stocks, debt securities, etc.
Alternative Investment Fund is described under Regulation 2(1)(b) of the Regulation Act, 2012 of Securities and Exchange Board of India (SEBI). AIF can be established in the form of a company or a corporate body or a trust or a Limited Liability Partnership (LLP).
Generally, high net worth individuals and institutions invest in Alternative Investment Funds as it requires a high investment amount, unlike Mutual Funds.
Types of Alternative Investment Fund (AIF)
This category includes funds that invest in start-ups, small and medium-sized firms (SMEs), and new businesses with strong growth potential and is socially and economically viable. Because these ideas have various effects on the economy. With the terms of job and growth generation, the government encourages with the plan of investment. These funds have proved a lifeline for already-successful firms in need of funding. Take a look at the many kinds of AIFs.
1. Venture Capital Fund (VCF)
Venture Capital Funds invest in high-growth start-ups that are experiencing cash constraints in the early stages of their business and require capital to develop or expand their operations. Because it is difficult for new firms and entrepreneurs to get funds through the financial markets, Venture Capital Funds have become the most popular option for their funding needs. They invest in a variety of businesses based on their company characteristics, asset size, and product development stage. Venture capital funds, unlike mutual funds and hedge funds, concentrate on early-stage investments. Each investor receives a proportional share in the firm that the VCF has invested in, based on their investment.
2. Infrastructure Fund (IF)
The fund invests in public assets like road and rail infrastructure, airports, and communication assets, among other things. Investors that are positive about future infrastructure growth can participate in the fund since the infrastructure industry has high entry barriers and little competition. Infrastructure Fund investors might expect a mix of capital growth and dividend income as a result of their investment. When an Infrastructure Fund invests in initiatives that are socially acceptable and practical, the government may offer tax incentives.
3. Angel Fund
This is a sort of Venture Capital fund in which fund managers combine money from a number of “angel” investors to invest in early-stage firms. Investors receive dividends when new enterprises become profitable.
Units are distributed to angel investors in the case of Angel Funds. An “angel investor” is a person who wishes to invest in an angel fund and adds business management knowledge to the table, therefore assisting the company in its growth. Because of their growing uncertainties, these investors usually invest in companies that aren’t sponsored by conventional venture capital funds.
4. Social Venture Fund
Socially responsible investment has spawned the Social Venture Fund (SVF), which invests in firms with a strong social consciousness and a desire to have a positive impact on society. These businesses are focused on producing money while also addressing environmental and social challenges. Despite the fact that it is a philanthropic investment, one may expect a return because the companies will still generate money.
5. Private Equity (PE) Fund
PE funds invest in private firms that aren’t publicly traded with stakeholders. Because the unlisted and unauthorized private enterprises are unable to raise cash with PE funds for help.Furthermore, these organizations provide their clients with a diverse portfolio of shares, lowering the investor’s risk. A defined investment horizon of 4 to 7 years is usual for a PE fund. The company hopes to be able to exit the investment with a decent profit after seven years.
Benefits of Investing in AIFs
People constantly evaluate the benefits of AIFs and other funds when investing in a fund. Learn the benefits of AIFs:
1. Uncorrelated with Stock Market
Every investor who has the stock market for a long time has certainly had some large successes and some significant losses. Anyone who is nearing retirement or has already retired has felt the pain of watching their portfolio decline, often dramatically. One of the key reasons investors seek alternative investments is to diversify their portfolios.
Many investors are discovered with private alternatives as a method to diversify their portfolios and hedge against volatility. As a result, if the stock market falls sharply, they will have a hedge of protection, and their whole investment portfolio will be unaffected. Even in a stable economy, the stock market is notoriously unstable, and alternatives are mostly immune to the public markets’ volatility.
2. Look at the Direct Ownership
What you’re getting in most public investments is a paper asset — the discounted value of future projected earnings. You don’t actually have any possessions. Even after investment in REIT, you’re still a long way from having your name on the real estate property’s deed.
When you purchase excellent wine or art, you are purchasing the bottles of wine or the oil painting directly. If you purchase a rental property, you own it outright. You have a lien on a property if you acquire a mortgage note.
3. Know about the Tax Benefits
Alternative investments might potentially offer significant tax advantages. Because of the structure of many alternative investments, you get to keep more of your profit. You should be a part of the fund or syndicate in many private alternative investments, and the tax benefits are passed on to you directly. Pass-through depreciation and long-term capital gains treatment are the two most major tax benefits. Depreciation expenditure (a non-cash expense) is deducted from net income by many real estate funds or syndications, lowering taxable income. Depreciation/depletion tax treatment for oil and gas assets is quite advantageous.
4. Identify the Passive Investments
Most busy investors value their time highly, and actively maintaining an asset or portfolio takes a significant amount of effort. Let’s look at real estate as an example, because that’s where most people assume they should start investing. They rapidly discover how much effort is necessary and how steep the learning curve is after becoming enthusiastic about the thought of renting a single-family house or even a modest multifamily apartment. There is a limitless supply of instructors marketing their “5 Step Plan to Success,” but recruiting co-investors, securing money, structuring the deal, discovering and appraising properties, and so on are all difficult tasks. Many investors quit up at this stage and think that there are no further possibilities.