Here’s Everything You Need To Know About Alternative Investment Funds (AIFs) (2024)

What Is An AIF?

An Alternative Investment Fund (AIF) is a privately pooled investment vehicle that collects funds from investors in accordance with a defined investment policy. The funds are infused as capital for the benefit of its investors.

As of May 2022, the Securities and Exchange Board of India (SEBI) registered more than 900 AIFs, with capital commitments growing at a CAGR of 63% between 2012 and 2022.

How Are AIFs Different From Traditional Investments?

Unlike traditional investments, AIFs do not fall under the purview of SEBI (Mutual Funds) Regulations, 1996; SEBI (Collective Investment Schemes) Regulations, 1999, or any other regulations of the board for regulating fund management activities.

Similarly, unlike traditional investments, AIFs are accredited to those who meet certain net worth criteria and may not be available to a wider range of investors.

What Kind Of Assets Do AIFs Invest In?

As per the Securities and Exchange Board of India (SEBI), AIFs fall under three major categories:

Category I AIF: This category of AIF includes:

Who Can Invest In An AIF?

Indian residents, non-resident Indians (NRIs) and foreign nationals can invest in AIFs.

According to SEBI, every AIF scheme should have a corpus of at least INR 20 Cr. However for angel funds, the corpus should be at least INR 10 Cr.

Except angel funds, no AIF shall accept an investment of value less than INR 10 Cr. However, for the employees or directors of an AIF or employees or directors of the fund manager, the minimum value of investment stands at INR 25 Lakh.

How Can One Invest In AIFs?

AIFs are designed for HNIs, family offices, institutional investors and other eligible investors who meet specific investment requirements. According to SEBI, an individual investor needs to have a minimum investment corpus of INR 1 Cr to start investing in AIFs.

AIFs are designed for HNIs, family offices, institutional investors and other eligible investors who meet specific investment requirements. According to SEBI, an individual investor needs to have a minimum investment corpus of INR 1 Cr to start investing in AIFs.

What Are The Benefits Of Investing In An AIF?

Portfolio Diversification: AIFs typically invest in non-traditional assets such as startups, which can offer diversification benefits and reduce overall portfolio risk.
Higher Returns: Since AIFs invest in non-traditional assets, they have the potential to offer higher returns than traditional investments. According to Inc42’s estimates, VC funds generate an estimated 20% average yearly returns. In comparison, stock markets and mutual funds generate 9.2% and 10% annual returns.
Limited Investor Liability: Investors often have limited liability, which means they are only responsible for the amount they have invested in the fund and not liable for losses beyond that amount.

What Are The Risks Associated With Investing In An AIF?

Higher returns often accompany greater risks. Some of the risks associated with investing in an AIF include:

Liquidity Risks: Unlike traditional investment that can be bought and sold easily, AIFs offer lesser flexibility and often come with limited liquidity. Further, investors are bound to invest for a minimum lock-in period of three years.

High Fee: The fee associated with AIFs is generally higher than traditional assets. This is because AIFs come with management fees, performance fees and other charges that may even reduce the overall return on investment

Regulatory Concerns: Compared to traditional investment funds, AIFs may have less regulatory oversight, which can heighten the possibility of fraud and mismanagement.

How Are AIFs Regulated?

AIFs are regulated by the SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012. The market watchdog regulates the registration, compliance, and ongoing reporting requirements for AIFs in India.

How Are AIFs Taxed?

The Finance Act, 2015, extends a tax pass to AIFs that are registered with SEBI as Category I and II. Any income earned by such AIFs is exempt from tax. Instead, such income is taxable directly in the hands of the investors of the AIF.

It is important to consult with a tax advisor to understand the specific tax implications of investing in an AIF.

Can An AIF Be Sold Or Traded On A Stock Exchange?

No, AIFs are privately pooled investment vehicles and are not permitted to make an invitation to the public to subscribe to its securities.

AIFs raise funds through the issue of an information memorandum or a placement memorandum.

According to SEBI, the applicants are prohibited by the memorandum and articles of association/trust deed/partnership deed from making any invitation or solicitation to the public.

What Are The Examples Of Prominent AIFs In India?

In September 2022, the Funds of Funds for startups (FFS) committed INR 7,385 Cr to 88 AIFs. For context, FFS was launched in 2016 under the Startup Initiative India to boost the country’s startup ecosystem.

According to the Centre, the prominent AIFs that lead startup investments under FFS include:

Chiratae Ventures: Its portfolio companies includeAxio, Blowhorn, Aura and BeepKart
India Quotient: Its portfolio companies includeWebEngage, Dhiwise, VyaPar and Pagaarbook
Blume Ventures: Its portfolio companies includeJai Kisan, Stellapps, ApnaKlub and Exotel
IvyCap: Its portfolio companies includeBiryani By Kilo, BlueStone, Miko and Lendbox
Waterbridge Ventures: Its portfolio companies includeAtlan, BigFatPhoenix, BimaKavach and BitClass
Omnivore: Its portfolio companies includeDeHaat, Krishify, Pixxel and AGRIM
Aavishkaar Capital: Its portfolio companies includeGoBolt, Mooofarm, Nepra and Vortex
Fireside Ventures: Its portfolio companies includeMamaearth, Boat Lifestyle, The Baker’s Dozen and Gynoveda

Here’s Everything You Need To Know About Alternative Investment Funds (AIFs) (2024)

FAQs

How does AIF funds work? ›

Alternative Investment Fund or AIF is a privately pooled investment vehicle that invests in alternative asset classes such as private equity, venture capital, hedge funds, real estate, commodities, and derivatives.

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Is it good to invest in AIF? ›

AIFs can also provide tax benefits to investors. AIF investors may be able to defer taxes on capital gains until they sell their investment in the fund. This can provide investors with greater flexibility in managing their tax liabilities.

What is the difference between a fund and an AIF? ›

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.

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What are the rules for AIF? ›

Cannot invest more than 25% of corpus in one investee company. Can invest in unites of other Cat. I AIFs but not in units of other funds of funds. Cannot borrow funds directly or indirectly or leverage except for meeting temporary funding requirements on not more than 4 occasions per year, not more than 10% of corpus.

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How do AIFs make money? ›

Benefits of investing in AIFs

AIFs can invest in assets or strategies that have high growth potential but also high risk, such as start-ups, private equity, hedge funds, etc. They can generate returns from multiple sources, such as capital appreciation, dividends, interest, fees, etc.

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Is AIF fund taxable? ›

Short-term capital gains from Category I and II AIFs are usually taxed at the applicable short-term capital gains tax rate based on the investor's tax bracket. Generally speaking, short-term capital gains are taxable at the rate of 15%.

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What are the pros and cons of alternative investment funds? ›

Alternative investments tend to have high fees and minimum investment requirements, compared to retail-oriented mutual funds and ETFs. They also tend to have lower transaction costs, and it can be harder to get verifiable financial data for these assets.

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Who controls an AIF? ›

The Securities and Exchange Board of India (SEBI) regulates the alternative investment funds in India. AIFs are defined in the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012.

Is AIF debt or equity? ›

3. Investment Focus (200 words): The primary investment focus of Debt Fund AIFs is to generate income through investments in debt securities. These funds invest in a variety of debt instruments, including corporate bonds, non-convertible debentures, commercial papers, and government securities.

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What is the minimum number of investors in AIF? ›

The minimum investment limit is Rs 1 crore for investors. For directors, employees, and fund managers, the minimum limit is Rs 25 lakh. Most AIFs have a minimum lock-in of three years. The number of investors in every scheme is restricted to 100.

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Why AIF is better than mutual funds? ›

Whether AIFs are better than mutual funds depends on individual investor preferences, risk tolerance, and financial goals. AIFs offer exposure to alternative assets and may potentially provide higher returns but often come with higher risks and may require larger investments compared to mutual funds.

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Can an ETF be an AIF? ›

Alternative assets include tangible assets like real estate and metals and financial tools like hedge funds, exchange traded funds (ETFs), mutual funds, venture capital, and many more. Real estate is frequently categorised as an alternative investment.

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How do alternative funds work? ›

At its broadest definition, alternative investments can include some exchange-traded funds (ETFs) and mutual funds that use strategies similar to hedge funds to mitigate risk. In other words, their portfolios are so diverse that their overall returns are not correlated to the stock market or the bond market.

What is the dividend income from AIF? ›

Withholding Tax: AIFs are required to deduct withholding tax at the rate of 10% on all dividend income distributed to resident investors. Surcharge And Cess: Surcharge and cess are also levied on capital gains and dividend income from AIFs at the applicable rates.

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