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 donâ€™t focus on the masses, they target sophisticated investors like HNIs from India and abroad who have large amounts of capital to invest.
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:
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.
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.
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.
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 stabilize 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.