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Foreign investments in Alternative Investment Funds in India

By - Tanya Kanojia on December 30, 2022

Alternative investment funds are the way to go if one is interested in investing options aside from the standard ones like cash, bonds, and stocks. While these plans need more investment and carry greater risk than mutual funds, but equally offer a better rate of return when compared to conventional solutions. These funds don't target the general public; instead, they go after sophisticated investors like HNIs from India and abroad who have a larger amount of funds to invest.[1]

Alternative investment funds in India, investment limits have been put in place over time by the Securities and Exchange Board of India (SEBI), which investors should be aware of before investing in these schemes such as:

  • According to the 2012 regulations, venture capital funds must invest at least 75% of their capital in unlisted equity shares and equity-linked securities. Additionally, these investments must be made in venture capital undertakings or companies that are listed or proposed to be listed in the SME category of exchanges.[2]
  • The Rs. 25 lakh minimum investment requirement will not be applied to grants obtained by authorised investors who invest in social enterprise funds.[3]

Table of Contents

What are alternative investment funds in India :

Alternative Investment Funds (AIFs) in India are defined by Regulation 2(1)(b) of the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012.[4] It refers to a privately pooled investment fund, which is established as a trust, company, body corporate, or limited liability partnership (LLP).[5] As a result, AIFs are private funds in India that would not normally fall under the purview of any regulatory body there.[6]

Further, Alternative Investment Funds in India, seek registration in one of three categories, according to Securities and Exchange Board of India (Alternative Investment Funds) Regulations. These categories are as follows:

Category I[7]: Invests primarily in start-ups, SMEs, or any other industry that the government deems to be both commercially and socially viable.

  • Venture capital funds (Including Angel Funds)
  • SME Funds
  • Social Venture Funds
  • Infrastructure funds

Category II[8]: These are alternative investment funds, such as debt or private equity funds, for which the government or another regulator does not specifically offer any incentives or concessions. These include real estate funds, private equity funds (PE funds), funds for distressed assets, etc.

CategoryIII[9]: Alternative Investment Funds, such as hedge funds or funds that trade with the intention of generating short-term returns, or other open-ended funds for which the government or any other regulator does not specifically offer incentives or concessions.[10] It includes Hedge funds, PIPE Funds, etc.

Alternative investment funds in India can be formed as a company, trust, limited liability partnership (LLP), etc.[11]And they are bound by the SEBI (Alternative Investment Funds) Regulations, 201. There are over 500 AIFs that are registered with SEBI, offering an investor a pool of options to choose the top alternative investment funds in India to invest in.

Thus, to answer the question of what are alternative investment funds in India? In simpler words, it is an alternative to conventional investment options are an alternative investment. For benefits and investment diversification, investors can purchase AIF funds. AIF funds are characteristically preferred by high-net-worth investors, retail investors, and individuals.[12] However, unlike traditional assets, they are difficult to buy and sell. The government is attempting to increase the transparency of these alternative investment funds.

Benefits of investing in AIFs include:

Alternative investment funds in India provide significant returns because they draw from a larger pool of potential investments. These funds, as opposed to many conventional products like debentures or bonds, are a better source of passive income because of their investment strategy. Additionally, since there is little reliance on the stock market, there are fewer possibilities of return fluctuations. As these funds provide a wide range of investment options, AIF investment returns are beneficial.

Benefit 1: Protection from volatility

An excellent strategy to stabilise the portfolio and safeguard investments from volatility is to invest in alternative investment funds. These schemes don't invest the capital in openly listed investment options. Because of this, they are independent of the bigger markets and do not change in response to their fluctuations.

Benefit 2: Decent portfolio diversification

AIFs allocate their funds to a far broader range of assets than the majority of other investment vehicles. They, therefore, offer great portfolio diversification, which helps to protect client investments during periods of market turbulence or financial crises.

Conclusion

To conclude, these alternative investment funds offer a different way to generate passive income. However, before making an investment, investors should thoroughly explore the platform, avoid making decisions based solely on the interest rate that an alternative investment offers, and carefully evaluate the top alternative investment funds in India. Instead of concentrating investment in one alternative investment fund, one should diversify it over several asset classes and begin investing in alternative investment funds in India with less capital.

The next significant rise in alternative investment products is anticipated in Asia and emerging economies, particularly India. AIFs in India are at the same stage as mutual funds in 2009 in terms of assets under management (AUM). Now, the industry and the market are prepared for a paradigm shift toward alternative investment funds.

With capital commitments growing at a 63 per cent CAGR between 2012 and 2022, over 900 AIFs had been registered with the Securities and Exchange Board of India (Sebi) as of May 2022. The report estimates that the global alternative investment AUM would rise from $4.1 trillion in 2010 to $10.7 trillion in `2020` and $17.2 trillion by 2025. Additionally, the report notes that important factors like the Russia-Ukraine War, increasing global inflationary pressures, rising interest rates (India's benchmark 10-year bond yield has increased to 7.42%), and upcoming elections (at least two general elections by 2030) could thwart the $400 billion in capital commitments the country had planned for by 2030.[13]

Incidentally, AIFs are regulated by the SEBI (Alternative Investment Fund) Regulations, 2012, which are defined as privately-pooled investment vehicles that amass assets to invest in accordance with a pre-set policy for the benefit of investors. Thus, AIFs are an intriguing investment alternative for investors, primarily HNIs, who desire high returns but are unwilling to assume significant risks. Based on their financial objectives and appetite for risk, investors can do thorough market research and invest in a particular category of AIF.

FAQs

What are AIFs?

Alternative investment funds are investment plans that allocate funds to financial instruments other than conventional investment options. They consist of private equity, venture capital, commodities, real estate, angel funds, etc.

Who should invest in alternative investment funds?

Alternative Investment Funds are suitable for residents of India, foreigners, and non-resident Indians who can invest a minimum of Rs. 1 crore for a minimum of 3 years.

What is the minimum amount required to invest in alternative investment funds?

1. Minimum investment –    INR 1 crore
2. Angel Investors – INR 25 lakhs
3. Directors, employees and fund managers of AIF – INR 25 lakhs

Does SEBI (the securities and exchange board of India) regulate alternative investment funds?

Yes, SEBI does regulate the AIFs.


[1] https://www.sebi.gov.in/sebi_data/attachdocs/1471519155273.pdf

[2] §16(2) (a), SEBI regulations, 2012.

[3] §10(c), SEBI regulations, 2012.

[4] Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012

[5]  §2(1)(b)(i), SEBI regulations, 2012.

[6]https://www.bseindia.com/Static/about/alternative_investment_funds.aspx#:~:text=It%20refers%20to%20any%20privately,any%20regulatory%20agency%20in%20India.

[7]Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, Regulation 3(4)(a)

[8] Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, Regulation 3(4)(b)

[9] Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, Regulation 3(4)(c)

[10] Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, Regulation 3(4)

[11] https://www.sebi.gov.in/statistics/1392982252002.html Please refer to this link for the latest statistics

[12] https://www.sebi.gov.in/sebi_data/attachdocs/1471519155273.pdf

[13] https://www.outlookindia.com/business/all-you-need-to-know-about-sebi-s-alternative-investment-fund-news-198378


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