CAT III Alternative Fund: What are they? Are they risky? (2024)

FAQs

CAT III Alternative Fund: What are they? Are they risky? ›

Category 3 AIFs are considered the riskiest category and include funds that employ complex trading strategies or invest in high-risk instruments. Category 3 AIFs are considered the riskiest category and include funds that employ complex trading strategies or invest in high-risk instruments.

Risks of Alternative Investments

Alternative investments are more complex than traditional investment vehicles. They often have higher fees associated with them. As with any investment, the potential for a higher return means higher risk.

For a closed-ended fund, the minimum tenure is three years. A Category III AIF can take leverage positions of up to two times the total fund corpus. 1. Category III AIFs invest in securities of listed as well as unlisted investee companies, derivatives, complex or structured products, or other AIF units.

AIFs are typically more complex and risky than traditional investment funds, but they also have the potential to generate higher returns.

Other AIFs that invest in unlisted securities, such as Debt Funds, Private Equity Funds and Pre-IPO Funds fall under Category II AIFs. Those AIFs that deploy complex trading strategies in secondary listed markets, derivatives and or may also use leverage at fund level such as Hedge Funds qualify as Category III AIFs.

Benefits of investing in alternatives

Because alternatives tend to behave differently than typical equity and bond investments, adding them to a portfolio may help to lower volatility, provide broader diversification, and enhance returns.

Equities and equity-based investments such as mutual funds, index funds and exchange-traded funds (ETFs) are risky, with prices that fluctuate on the open market each day.

The primary difference between Alternative Investment Funds (AIFs) and Mutual Funds (MFs) is that AIFs are typically available only to a limited number of accredited investors and involve higher minimum investments, whereas mutual funds are accessible to a broader range of investors with generally lower entry barriers.

Category III AIFs are further divided into Long Only and Long Short Funds. Many well-known companies with long only AIFs are Motilal Oswal, ASK, Alchemy, IIFL, Abakkus, Sage One, and so on.

Alternative Investment Funds, or AIFs, are a growing asset class in India. Defined as privately pooled investment vehicles, AIFs collect funds from sophisticated investors, both domestic and international. These funds operate under a clearly defined investment strategy, aiming to generate returns for their investors.

What is the average return in AIF? ›

The Bottom Line

CFPs and AIFs offer stellar reliability and transparency for their clients. AIFs give clients peace of mind because their certification displays their devotion to their clients' needs.

Category I AIFs and Category II AIFs cannot to invest more than 25% of the investable funds¹ in one company, and in case of Category III AIFs, the limit is 10%;

Category III AIFs invest in equities of listed and unlisted companies. They can be open- or close-ended, where minimum tenure of close-ended funds is three years. Three out of the top five AIFs in 2023 were close-ended funds.

Understanding CAT I/II/III Approaches in Aviation

CAT II and CAT III: These offer lower minimums for visibility and decision height, with CAT III allowing for almost zero visibility landings in some cases.

Disadvantages of alternative investments

Alternative investments are often considered high-risk due to their illiquidity, lack of transparency, and complexity. Investors may lose their entire investment if it does not perform as expected or becomes illiquid.