What Are Alternate Investment Funds (AIFs), its Types & Features

Alternative Investment Funds, or AIFs, are a singular investment option that is popular among seasoned investors who want to earn high returns and have a higher risk appetite. If you’re an investor looking to drive your profits and have a reasonably high-risk tolerance, AIFs might be a good investment option for you.

To help you decide whether these should make it into your portfolio, here we discuss everything you should know about them. 

What are Alternative Funds?

Alternative Investment Funds, or AIFs, are a type of investment vehicle that invests in assets that don’t fall within the conventional categories of stocks, bonds and cash. These funds instead invest in hedge funds, real estate, private equity, etc. 

Typically, High Net worth individuals (HNIs), institutions and the like invest in AIFs as the investment amount is considerably higher than usual investment amounts. 

Now that you know what are AIF funds, let’s discuss their three categories, which include:

1. Category I

These are AIFs that invest in start-ups, social ventures, infrastructure, SMEs and other sectors that are economically or socially beneficial. This AIF category enjoys certain incentives from the government.

2. Category II AIFs

These AIFs invest in private equity funds and debt funds that don’t come under Category I or III. They usually invest in a diverse range of instruments without borrowing unless for day-to-day operations.

3. Category III AIFs

These AIFs leverage complex trading strategies, such as hedging, to drive short-term returns. Examples include hedge funds and Private Investment in Public Equity (PIPE).

Key Features of Alternative Investment Funds

Now that you know what are AIF investments, let’s discuss their core features:

• Reduced Liquidity: AIFs can be challenging to buy and sell quickly due to low liquidity.
• Higher Risk: AIFs have a higher risk than traditional investment avenues since they are designed for individuals seeking higher returns.
• Singular Fee Structures: AIFs usually charge a high fee with a minimum investment requirement. However, they have lower transaction costs.
• Complex Valuation: AIFs invest in alternative assets, which can be challenging to assess and value due to their unique nature and less standardised reporting. 
• Diversified Assets: AIFs invest in a wide variety of assets, from private equity and commodities to infrastructure and social venture funds.
• Regulatory Framework: AIFs are subject to a regulatory framework declared by the Securities and Exchange Board of India (SEBI) and their structures can differ with local regulations and jurisdiction.

Final Thoughts

Now that you know what is AIF fund, and what are AIF’s key features, you can make an informed decision about whether these should make it to your portfolio. A great option for those seeking to diversify their investments, AIFs do come with a high risk, making them best suitable for seasoned investors.

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