Alternate Investment Funds (AIFs): An Overview

By Mayashree Acharya


Updated on: Nov 23rd, 2022


10 min read

If you are looking for investment options other than traditional ones like cash, bonds and stocks, alternative investment funds are the way to go. These schemes offer a higher rate of return as compared to conventional options but also need more investment while being riskier than mutual funds. These funds don’t focus on the masses, they target sophisticated investors like HNIs from India and abroad who have large amounts of capital to invest. 

Find out more in the article below. 

What are the different types of AIFs in India?

AIFs invest in various alternate investment options including commodities, angel funds and others. The different types of alternative investment funds are as follows:

1.Category 1

In Category 1, you will find Alternate Investment Funds that invest in start-ups, SMEs and new economically viable corporations that have high growth potential. They include the following:

  • Infrastructure funds

These funding schemes primarily invest in companies that are engaged in infrastructural works like constructing railroads, airports, ports etc. Individuals who like to invest in infrastructural development generally invest in these types of funds. 

  • Venture capital funds (VCF)

Venture capital funds put their money into promising entrepreneurial businesses that have huge capital requirements. High net-worth individuals who have a high-risk high return policy usually invest in VCF.   

  • Angel funds

This type of AIF generally invests in new start-ups that do not receive investments from Venture capital funds. Each angel fund investor generally allocates minimum funding of Rs.25 lakh.

  • Social venture funds

Social venture fund schemes put their money in businesses that take part in philanthropic activities. They help people improve their standards of living and also provide good returns to their investors. 

2. Category 2

This category of AIF funds do not take debt for purposes other than daily operations and includes the following:

  • Debt funds

These funds invest in debt securities of unlisted companies that follow good corporate governance models and have decent growth potential. However, they are not for conservative investors as they have a low credit rating. 

  • Funds of funds

Funds of funds are schemes that put their money in other Alternative Investment Funds. 

  • Private equity funds

Private equity funds invest in unlisted private businesses that face difficulty in raising capital by issuing equity and debt instruments.  

3. Category 3

Category 3 funds may be leveraged and use advanced trading strategies, and include the following:

  • Hedge funds

Hedge funds collect money from investors and corporations in order to invest in debt and equity markets both on the domestic and international levels. These schemes follow an aggressive investment strategy to provide a higher return on investment for its investors. Moreover, they have a high expense ratio.

  • Private investment in public equity fund (PIPE)

This type of funding scheme invests in public firms by buying their shares at discounted prices. 

Top 10 AIFs in India

The following are the top alternative investment funds in India:

NameInvestment Strategy
Abakkus Asset ManagerEmerging Opportunities Fund
Girik Advisors Girik Multicap Growth Equity Fund
Alchemy Capital Leaders of Tomorrow (ALOT)
Vishuddha Capital India Value and Growth Fund
Roha Asset Managers Roha Emerging Companies Fund
Ampersand Capital Growth Opportunities Fund Scheme
Proalpha Capital QG Dynamic Equity Fund (QGD)
Carnelian Asset Management Capital Compounder Fund
TCG Advisory Services SMF Disruption Fund
Accuracap Tech Vectra Fund

What are the benefits of AIF investments?

Investing in AIFs will provide you with benefits like:

  • Security against volatility

Investing in Alternative Investment Funds is a great way to protect your investments from volatility and stabilise your portfolio. These schemes do not put their funds in investment options that trade publicly. Hence, they are not related to the broader markets and do not fluctuate with their ups and downs. 

  • Excellent portfolio diversification

AIFs allocate their funds to a wide array of assets that are significantly more than most other investment vehicles. Thus, they provide excellent portfolio diversification that can safeguard your investments in times of market volatility or financial crisis. 

  • Profitable returns

AIF investment returns are profitable as these funds have numerous investment options. They are a better source of passive income as compared to conventional investment instruments. Furthermore, the returns are less prone to fluctuations as these schemes are not linked to the stock market. 

Taxes on Alternative Investment Fund investments

These are some points on AIF investment taxation that you must keep in mind before opting for these schemes:

  • Categories 1 and 2 of AIFs are not subject to taxation in the hands of the AIF. However, if you earn by investing in them, taxes will be implemented based on your current tax slab.
  • If you invest in an AIF that allocated its funds to equity investments, you have to pay a capital gain tax of 10% for the long term and 15% for the short term. 
  • Category 3 funds get taxed at the maximum marginal rate of 42.7%. In case you invest in them, you receive your earnings after this deduction.  

SEBI AIF regulations

Over the years, the Securities and Exchange Board of India (SEBI) has implemented some AIF investment restrictions that individuals must know before investing in these schemes. Some of them are:

  • As per the 2012 regulations, it is mandatory for venture capital funds to allocate at least 75% of their capital in equity-linked instruments and unlisted equity shares. Moreover, these investments have to be in companies of venture capital undertaking or businesses listed in the SME section of exchanges. 
  • In the case of accredited investors, the minimum investment amount of Rs.25 lakh shall not be applied to grants received when putting their money into social venture funds. 
  • Category 3 AIFs like hedge and private equity funds are allowed only to invest 10% of their capital in a firm.

What is PMS? AIF vs PMS?

PMS or Portfolio Management Services are customised investment services for investors by taking care of their risk appetite, return expectations and time commitments. They are highly personalised and the investors get their new bank account and Demat account with it to hold the securities.

When it comes to their comparison, AIF needs huge capital requirements with lock-in periods whereas PMS provides a bit more liquidity. AIF offers better flexibility and diversity in non-conventional securities while PMS offers live tracking and tuning of your investments. Both of them have a high risk-reward ratio, so investors can decide on the basis of their investment goals, liquidity, tenure and security preferences.

Now that you have a fair idea of AIF investment, you can choose a fund scheme that aligns with your investment goals. However, before you invest, do conduct thorough research on the fund’s past performance to make an informed decision. 

Frequently Asked Questions

What is an alternative investment fund?

Investment schemes that allocate their funds to financial instruments other than traditional investment options are called alternative investment funds. They include angel funds, commodities, real estate, venture capital, private equity, etc. 

How to invest in alternative investment funds in India?

If you are an individual investor, you need to have a minimum investment corpus of Rs.1 crore to start investing in AIFs. In addition, you have to provide proof of income, PAN and ID proof. 

How to start an Alternative Investment Fund?

In order to start an Alternative Investment Fund, you have to apply to SEBI, bring an authorisation letter, be eligible according to SEBI compliances, submit the final application, wait for the scrutinising procedure and accept the Grant of Registration Certificate. 

How many alternative investment funds are there in India?

According to SEBI, there are more than 900 registered AIFs in India right now. 

Who should invest in alternative investment funds?

Residents Indians, foreign nationals and Non-Resident Indians who can invest a minimum of Rs.1 crore for a minimum of 3 years should invest in Alternative Investment Funds. 

How is AIF different from mutual funds?

Alternative Investment Funds offer a higher degree of flexibility than mutual funds as they invest in unlisted shares and also use shorting and leverage. 

What is the difference between PMS and AIF?

In a Portfolio Management System (PMS), each investor has a separate Demat account, and there is no pooling of funds. Moreover, individuals can withdraw their capital at any point in time. Inversely, Alternative Investment Funds (AIFs) ppool capital for their investment objective and generally have a lock-in period of 3 to 5 years.   

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About the Author

I am an advocate by profession and have a keen interest in writing. I write articles in various categories, from legal, business, personal finance, and investments to government schemes. I put words in a simplified manner and write easy-to-understand articles. Read more

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Quick Summary

Alternative Investment Funds (AIFs) offer higher returns but are riskier than traditional funds like cash, bonds, and stocks. They cater to sophisticated investors like HNIs and focus on new economic ventures. They can be classified into three categories with different investment strategies. AIFs provide diversification, protection against volatility, and profitable returns, with taxation varying based on the category. There are over 900 registered AIFs in India. PMS and AIF differ in capital requirements, liquidity, and investment diversification.

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