Different types of Alternative Investments Funds in India — Overview

Alternative Investments Funds (AIF) is termed Under Regulation 2(1) (b) of the Act, 2012 of SEBI (Securities and Exchange Board of India). It can be formed in the form of a company or a trust or an LLP or a corporate body. An AIF includes pooled investment funds which invest in hedge funds, venture capital, managed futures, etc. In India, AIF boosts the Indian Economy since it came into India in 2012.

Alternative Investments Funds in India(AIF) are different from the main investment methods like bonds, stocks, etc. and this is considered as private investment opportunities. In AIF, only high net worth persons or organizations invest because it requires a high amount of investment, unlike mutual funds. Scroll down to check more information regarding different types of Alternative Investments Funds in India.

What are the different types of Alternative Investments Funds in India?

There are three different categories in Alternative Investments Funds, under which there are different types of funds.

• Category 1:In this category, funds which invest in SMEs or new businesses or new companies or new startups which have a high potential for growth and which are considered economically and socially visible. The Government of India focuses and promotes these projects because they have a multiplier effect on the growth of the economy and job creation. These funds are the lifeline of startups for capital.

In category 1, the following are different types of funds:

Venture Capital Fund (VCF): VCF invests in SMEs or startups or new businesses which have high growth capabilities, but they are facing an investment crisis in the starting period and need some funding to form or spread their business. So, Venture Capital Fund help new startups or new businesses to raise fund because, before VCF, it is very difficult for startups to raise funding under capital markets. Those investors who have high net worth and want to take high risk and high return investment options can prefer to invest in Venture Capital Fund.

1. Infrastructure Fund: The infrastructure fund invests for the development of public properties such as road infrastructure, airport infrastructure, communication properties, rail properties, etc. If an Infrastructure fund invests in socially feasible projects, the Government may also cover tax benefits on such types of investments. Also, returns from investing in IF can be a combination of capital progression and dividend income.
2. Angel Fund: Angel Fund is a type of VCF, in which the fund manager pool money from several “angel” investors and invest in entrepreneurs or startups for development and growth. In Angel Fund, units are allotted to the angel investors and an angel investor in Angel Fund means that an individual who wants to invest in this fund and brings in business management experience or guiding the entrepreneurs or new startups in the right and proper track.
3. Social Venture Fund: This type of fund focuses on society, and they invest in companies that have a strong social conscience and aim to change society for their betterment. These types of companies mainly focus on making profits and solve some related social problems and environmental related problems. In this fund once can still except returns because this type of business still make huge profits. Social Venture Fund mostly invests in all the projects related to the country’s development and they can change the society and bring managerial practices, technologies, and massive experience which makes it a win to win deal for all the shareholders of the companies which include enterprises, society, and investors.

In category 2, the following are different types of funds:

• In this category, funds are investing in various equity securities and debt securities. All the funds which are nor mentioned in category 1 and 3 by SEBI (Securities and Exchange Board of India), fall under this category. The Government does not give any type of concession or incentives.

1. Private Equity Funds: This type of fund invests in unlisted private companies and takes a share of the company’s ownership. These unlisted private companies cannot tap capital through the issuance of a debt instrument or equity instrument; they are looking for Private Equity Funds. A private equity fund has a fixed horizon ranging from 4 to 7 years for investment, after seven years, the firm thinks that it would be able to exit the investment with a proper amount of profit.
2. Debt Fund: This fund helps those companies who are facing some financial crises. So, companies having high capabilities to grow and good corporate practices, but they are facing some financial problems that can be a good option for debt fund investors. According to the SEBI Regulations, the amount invested in this fund cannot be used for the purpose of giving loans, as Alternative Investments Funds is a private pool investment vehicle.
3. Fund of Funds: It’s a combination of several Alternative Investments Funds. This fund invests in a portfolio of other Alternative Investments Funds rather than making its own portfolio and decide which sector to invest in. Remember, this fund under various Alternative Investments Funds cannot issue parts of funds in public, unlike Fund of Funds under Mutual Funds.

Following are different type of funds under Category 3:

• Category 3: In this category, it includes all the funds that have complex and varied investment strategies so one can earn a decent return. The government does not give any specific incentive on these funds.

1. Hedge Fund: This fund invests in domestic and international markets to generate high returns. This fund is less regulated as compared to mutual funds or other investment vehicles. But they are very expensive as compared to other investment instruments. Hedge funds charge up to 2% as the asset management fee and take 20% of the profits earned as a fee.
2. Private Investment in Public Equity Fund (PIPE): It is a privately managed pool of private funds reserved for public investments. When an investor or an institutional buys stock directly from a public company at a discounted price, which enables the investor to purchase a stake in the company.

Conclusion

In the future, Alternative Investments Funds will surely grow, and the number of the domestic investor will also increases which helps the Indian Economy to grow. In the coming decades, they will need to make decisions on what kind of firm they are, how much they intend to grow and what type of business model they want to adopt, etc.