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AIFs, largely known as Alternate Investment Funds in India, are privately pooled investment instruments that invest in alternate investments and aim to generate higher returns than conventional investment vehicles such as mutual funds. 3 categories come under AIFs, they are Category I, II, and III. In this blog, we’ll be exploring these 3 categories of alternate investment funds.
Alternative Investment Funds – Category I
Under this category, funds invest in early-stage companies or start-ups that have the potential to grow. Let’s have a look at them one by one.
- Venture Capital Fund: These AIFs invest in high-growth potential businesses, specifically in start-ups during their initial stages.
- Angel Funds: Angel investors invest in early-stage companies that can grow exponentially.
- Infrastructure Funds: These funds invest in companies involved in infrastructure development, such as roads, railways, etc.
- Social Venture Funds: These funds invest in socially responsible businesses and aim to generate potential returns for investors while positively impacting our society.
Alternative Investment Funds – Category II
Under this category, AIFs invest in private companies and debt funds. Let’s have a look at them.
- Private Equity Funds: These funds invest in private companies that are not listed on the stock exchange. Unlisted companies raise their capital through debt and equity instruments under this category of AIFs.
- Debt Funds: These funds invest in debt securities of unlisted companies that have efficient corporate governance and high growth potential. This can be riskier for those investors who seek a conservative approach due to low credit ratings.
- Funds of Funds: They primarily focus on alternative investment funds and don’t have their own portfolio.
Alternative Investment Funds: Category III
In this category, AIFs in India invest in publicly traded companies and hedge funds. Let’s have a look at them.
- Private Investment in Public Equity Fund (PIPE): This fund invests in publicly listed companies as they buy shares at a lesser price. The main objective of PIPE is to raise capital for the public company.
- Hedge Funds: These funds adopt complex and sophisticated investment strategies to generate high returns regardless of market conditions. Hedge Funds don’t get any tax benefits.
Looking to know the emerging trends of AIFs in India? Click here.
Benefits of Investing in Alternative Funds in India
- Potential of High Returns: Investors who are looking to generate high returns. However, they need to consider the risk element associated with AIFs.
- Diversification: These funds provide diversification to an investment portfolio.
- Less Volatility: These funds are not directly related to the stock market. So the market’s volatility doesn’t impact much on these funds.
Conclusion
Alternate Investment Funds can be an interesting investment approach for HNIs who are looking to expand their wealth. However, one should analyze the risks that are associated with it. Investors can do thorough research before they start investing in AIFs.
