Types of Alternative Investment Fund

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When people with a common investment goal decide to pool their money into a collective fund and then that fund is used for investing in different asset classes other than stocks and bonds under the Alternative investment funds. However, there are different categories of these as well. To make it easier for you to understand here is the detail of types of alternative investment fund. 

The AIF minimum investment and activities vary and hence they fall under different categories, the detail of which is provided here. 

What are Types of AIF?

Alternative Investment funds are categorized into three major classes as per SEBI. Now, this classification is broadly done on the basis of the assets and companies they are investing in, and further each broad category allow you to allocate your investment in different kind of funds.

Here are the major AIF products that provides you the option to diversify your portfolio:

  • Private equity or Venture capital
  • Hedge funds
  • Real Estate
  • Tangible Assets
  • Managed Futures
  • Derivative trading
  • SME funds
  • Social Venture funds

Now all these Alternative Investment Funds regulated by SEBI. Let’s now have a look at the broad classification of the fund.


Alternative Investment Fund Type 1

The first Alternative investment fund type includes the AIFs whose investments are startups friendly and socially feasible and they promote the economic growth of the country. 

These funds act as a lifeline to the startups that are struggling to generate funds for their operations in the initial phase. These funds identify the startups with higher growth potential and invest in them providing them financial support. When those startups grow, the VCFs reap their rewards.

1. Venture Capital Funds (VCF)

Since it is difficult for the new companies to generate funding through the equity market, these funds pool the money coming from the investors who want to invest in equity ownership and invest in these companies depending on their profiles and business plans. 

  • Minimum Lock-in period: 3 Years
  • Minimum Investment: ₹ 1 crore
  • The maximum investment in one company: 25% of the total fund

2. Social Venture Fund

Under this category, the funds are invested in projects and firms that not only aim to make profits but also bring a change in society as well as try to solve environmental issues. 

SVF aims at investing in securities of trusts, societies, and companies to promote social welfare. 

  • Minimum Lock-in period: 3 Years
  • Minimum Investment: ₹ 1 crore
  • Minimum 75% investment required in the companies with positive social impact 

3. SME Funds

This is also only a part of the Venture capital fund where the equity investments are made into Small and Medium-sized Enterprises to promote their growth and make profits out of their growth.  

  • Minimum Lock-in period: 3 Years
  • Minimum 75% investment needed to be done in SMEs

4. Infrastructure Funds

As the name suggests, Infrastructure funds aim at investing in public assets to develop the infrastructure of the economy. These investments include investing in public assets such as railways, roadways, communication assets, etc, and making profits. 

Since these investments help the government build infrastructure for the public, it sometimes extends the tax benefits to the investors in return. 

  • Minimum Lock-in period: 3 years
  • The maximum investment in one company: 25% of the total fund
  • Maximum number of people in one scheme: 1000

Alternative Investment Fund Type 2

The second Alternative Investment fund type means investing in private equity funds or debt funds that are not put in either type 1 or type 3 by SEBI. The government offers no tax benefits or any other incentives for these investments. 

Private Equity Funds invests in the shares of unlisted private companies to buy their ownership. This helps the unlisted companies raise funds too since they can’t raise the funds by equity or debt securities as they are not listed on any exchange. 1. Private Equity (PE) Funds

  • Minimum Lock-in period: 4 years
  • Usual Lock-in period: 4 to 7 years
  • Minimum Corpus required: ₹ 20 crore

2. Debt Funds

Debt funds are a type of Alternative Investment fund that aims at investing in the debt securities of listed as well as unlisted companies. 

This happens when a company struggles to raise capital and then because of their low credit score, the investors are reluctant to buy their bonds in the equity market. This is when Debt funds come into the picture as it invests in the debt securities of the companies with good corporate practices and high growth potential. 

  • This kind of investment often comes with a high risk but high reward at the same time. 
  • It is because the investments are made in companies with low credit scores and their chances of defaulting are high but at the same time, these investments yield high returns. 

3. Fund of Funds (FOF)

In this category, the AIF invests in the portfolio of different AIFs instead of planning its own investments. Basically, an AIF identifies another AIF with high growth and profit potential and decides to invest in its portfolio (and of course, there is a difference between AIF and PMS).

However, FOF under AIF can’t issue units of funds publicly. It is only allowed with FOF under Mutual funds

But make sure to remember the fact that Alternative Investment Funds vs Mutual Funds are totally different concepts and have different investment capacities, risk levels and return expectations.


Alternative Investment Fund Type 3

The third Alternative investment fund applies complex trading strategies to leverage profit. The trading strategies are diverse as the fund invests in both listed and unlisted derivatives. 

  • The types of funds under Type 3 can be both open-end and close-end which means they can come up with and without lock-in periods. 
  • Additionally, the government regulates them less in comparison with the Alternative investment fund type and type 3 which allows these funds to continue their operation without having to publish their information regularly. 

Here too, the government offers no tax benefits or any other incentives. 

 

1. Hedge Funds

These funds are considered highly risky investment practice choices but at the same time, they can be really fruitful. In a hedge fund, the fund managers use a diverse range of strategies that includes buying regular securities and listed or unlisted derivatives with borrowed money or trading assets that are only understood by a limited number of people to maximize the leverage. 

According to the current rules, these hedge funds can borrow up to 200% of the fund size. 


2. Private Investment in Public Equity (PIPE)

Under the PIPE category, the fund manager buys shares of publicly traded companies at a discounted rate. It doesn’t only give the investors ownership in the company at a cheaper rate but also infuses the capital into the company helping its growth. 

This is a lot more useful for SMEs that are struggling with funding. Since it takes less timing & paperwork and its regulation is a lot simpler, many companies prefer PIPE over the secondary issue of the shares since it helps with the capital infusion at a quicker pace even though the money coming in is less in comparison because the shares are sold at a discounted rate. 


Alternative Investment Fund Taxation Schemes

The government imposes different kinds of taxations depending upon the nature of the Alternative Investment fund type. 

  • Alternative investment funds type 1 and type 2 don’t have to pay any tax on their regular earnings. 
  • In the case of capital gains, the investors of AIF types 1, 2, and 3 all have to pay a 15% tax or a 10% tax depending on their holding period. For short-term gains, they are taxed at 15% while for long-term gains, the tax limit is 10%. 
  • Alternative investment fund type 3 has to pay taxes according to the highest income tax slab level. 

Sponsors According to the AIF Types

A sponsor is a person who sets up the AIF and henceforth, he or she has to pay a continuing interest in the AIF. This also varies as per different AIF types. 

 


Conclusion

An alternative investment fund can be a great option for portfolio diversification since it gives you a wide range of choices to invest your money. Moreover, most of the investments are free of stock market volatility which helps in keeping your funds stable and your mind relaxed for a longer period of time. 

On top of that, you get several tax benefits if you invest in the first two AIF types. You also contribute to positive social and environmental changes by funding the companies looking to do so. AIF also helps a lot of startups gather funds. 

Overall, Alternative investment funds can be a great investment option for you if you are someone who doesn’t want to keep his or her investments limited to only a few sectors. 


Now manage your portfolio by investing in the right kind of funds and investment options. To avail of the AIF investment services, fill in the basic details in the form below:

AIF

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