Is an AIF Right for You? A Practical Look at Your Options

To invest is to embark on a journey, and as it is always said the choices one make when on a journey can definitely affect the outcome of the journey. Due to the many changes that are being experienced in the financial markets, there are many investors who are in search of other financial products which are not in the category of mutual funds or stock. One of such alternatives is the Alternative Investment Fund (AIF). However, that is a question you may be asking yourself, is an AIF suitable for me? Now it’s time to see just what AIFs are, why they might benefit you and whether they should become part of your portfolio.

 What is an AIF?

 An AIF, therefore, is a privately pooled investment fund that mobilizes funds from investors – domestic and international – to invest in instruments that are otherwise illiquid and unavailable to the public raising capital. Such are private equity, real estate, hedge funds, venture capital, and a lot of others. AIFs are employed by High net worth individuals and Institutional investors who wish to expand their portfolio and who are willing to take a higher risk in the hope of getting better returns.

 Types of AIFs

 AIFs are classified into three broad categories by the Securities and Exchange Board of India (SEBI):

 1. Category I AIFs: There are SEZs, and they mostly are funds targeted at commercially sustainable and socially responsible sectors such as infrastructure, SMEs, venture capital, startups, etc. They often have to cope with government incentives owing to their primacy of the growth development paradigm.

 2. Category II AIFs: This is the largest group that comprises of private equity funds, debt funds as well as funds of funds (FOF). These funds are not privileged to any special incentives or concessions and are involved in delivering long-term capital with diverse industries.

 3. Category III AIFs: These are hedge funds or funds that use differentiated or elaborate approach to investing such as the use of derivatives. They are usually oriented to accrual of the quick and tangible profits and might be very risky.

Why Consider an AIF? 

 Investing in AIFs offers several potential benefits:

 1. Diversification: For this reason, through AIFs, investors can access asset classes that cannot otherwise be accessed through conventional investments. This diversification can serve to minimize the risks inherent in investment while at the same time increasing returns.

 2. Access to Exclusive Opportunities: They mainly focus on organizing the transactions of such assets as private firms, new initiatives, or narrow-profile real estate initiatives.

 3. Professional Management: AIFs are run by professionals with skills in the management of the often volatile markets and sophisticated investment plans thus translating to better returns.

 4. Flexibility:

AIFs are available in all risk classes ranging from the lowest risk to the highest level of risk hence one can select a fund house of his/her desire in terms of risk taking ability.

 Potential Downsides

 While AIFs offer many benefits, they are not without risks:

 1. High Entry Barrier: AIFs are also presented by high minimum investment thresholds, thus targeting mainly the WAP class of investors.

 2. Liquidity Risk: An AIF usually has a lock-in period longer than mutual funds or even stocks, thus you stand to lock your money for many years.

 3. Higher Fees: AIFs are more tailored form of funds which due their active management are more expensive, which eats into your gains.

 4. Regulatory Risks: Like all American Investment Funds, the operations of the fund are regulated, and alterations of regulations may affect the fund’s performance or management.

How to decide the need and the type of an AIF:

 When you are in a position to determine whether an AIF investment is suitable for you it is important to consider the goals and objectives you have in place, your tolerance to risk and the time horizon you are willing to invest in the particular investment. Here are a few questions to consider:

Here are a few questions to consider:

 - What can you afford to lose for having more volatility or variance in your returns? As mentioned earlier, AIFs are relatively a risky investment form as compared to the traditional investment types. Do you feel that managing the business at such a risky level is something you are okay with?

 - I desire to know whether you have any financial targets. If you are an investor seeking long term capital appreciation and are willing to take on the risks associated then AIFs might fit the bill.

 - Is it possible, that you have all required funds? AIFs generally demand a huge capital by the time of entry, so make certain you have the CAPITAL. IT that is required.

 - Are you in search of diversification to your portfolio? If you want to diversify from the core investments, then AIFs have the potential of providing niche returns.

 Conclusion

 Alternative Investment Funds (AIFs) could therefore be a potent solution to such individuals who seek to diversify their portfolio with other investment opportunities that are exotic. However, they are not without certain difficulties and prospect of dangers which must be taken into account. If you have the appetite for loss, assets and financial resources to support it and a long investment horizon then an AIF can be a useful part of your portfolio. Like with any investment, it is important to research it, talk to financial advisors, and consider and know the pros and cons before getting into the investment.

 It can therefore be said without any qualm that investing is more than just seeking to make a profit, it is about making good decision. With AIFs the decision is somewhat similar, it’s not just about the given investment but about the situation which is facing the investor.

SEBI Registration No:

PMS: INP 000006323

Investment Advisory: INA 000018337

BASL Membership No: 2036

Disclaimer

1.      Registration granted by SEBI, Membership of BASL, and Certification from the National Institute of Securities Markets in no way guarantee the performance of the intermediary or provide any assurance of returns to Investors

2.      The Securities Quoted are for illustration only and are not recommendatory

3.      Investments in the Securities Market are subject to market risk, please read the offer document carefully before investing.