As India continues to create wealth, retail investors have started looking at option beyond mutual funds, real estate, equities, etc. This has also given a significant boost to alternative investment funds (AIF).
According to SEBI, an AIF is a “fund established or incorporated in India, which is a privately pooled investment vehicle, that collects funds from sophisticated investors, whether Indian or foreign, for investing it by a defined investment policy for the benefit of its investors.”
SEBI identifies these funds in three broad segments - Category I AIFs include startup, early-stage venture funds or infrastructure funds while Category II includes real estate funds, private equity, debt funds or funds for distressed assets. And Category III includes funds with diverse trading strategies, hedge funds or ones with an eye on short-term returns.
Given the fact, that AIFs were launched in 2012, the segment has now grown to a USD 25 billion industry with more than 500 funds. Umang Papneja - Senior Managing Partner and Chief Investment Officer, IIFL Wealth Management says, "Every year the total funds raised has almost doubled compared to the previous year. Commitments raised in AIFs depict a healthy figure at INR 1.8 trillion."
Commenting on the growth of the asset class, Papneja says that the funds' ability to customize and create products using different asset classes has made the AIF regulations a game changer of sorts in Indian financial market history.
“Globally, allocation to alternative investment space is approximately USD 7 trillion, which means, allocation to hedge funds, private equity and other alternative strategies is now almost equal to 10 per cent of world’s listed equity market capitalization,” he shared while adding that, “Alternative investments are becoming more popular for investors. Proponents of these non-traditional investments maintain the average investor will now have access to assets not correlated to the stock market, offering diversification and potentially higher returns when compared to mutual funds, stocks and bonds.”
The Start-up and Other Factors
Additionally, there is significant activity in the Category I. As of June 2017, Category I registered commitments worth INR 28717.65 crores as against INR 337 crores in 2012.
The push is majorly led by venture capital funds, which noted a commitment of INR 17992.63 crore and hence, we cannot ignore the startup ecosystem’s contribution to the growth of this asset class.
Giri Krishnaswamy, CIO of The Acord Fund, Centrum Alternatives says AIFs have been picking up steam especially with the emergence of a start-up ecosystem maturing in the country. Even in the public market space, the AIFs have gained popularity amongst the High Net worth individuals
“We expect that this universe of AIF would get more broad-based, as pooling vehicles for investments in equity (from seed to Pre IPO to even Public markets), Debt (structured, distressed etc.) and also encompass real estate funds in the future. It is an emerging asset class and given that the investment limits are set higher, the AIF structure is intended to be of interest to HNIs & Institutions,” he explained.
What's Getting Investors Excited?
The minimum investment amount in an AIF is INR 1 crore and hence the majority of the investor in this segment are HNIs or institutions.
“Investors interested in this asset class are High net-worth individuals/ Ultra high net-worth individuals and institutions that have an appetite for risk and would like to diversify their portfolio holdings by taking a small exposure to a higher risk asset class. Typically this class of investors has the risk appetite not only in terms of quantum but also have the ability to hold onto these investments for a longer duration,” Krishnaswamy pointed out.
During the early days of AIFs, even though investors were excited about the prospects of these funds, lack of awareness about the functionality of the fund made them apprehensive about investing. Several investors were unsure how these investments would align to and add value to their portfolios.
Papneja says the industry has spent considerable time in early stages explaining to the clients the advantages that these funds would provide to their portfolios.
“It is important that the investor understands the product and is made aware of the opportunities and risks in investing in the same. The recent crisis in financial institutions and the cascading effect it has had on investments have got investors worried about any collateral damage that can happen to their investments. This is not specifically for AIF but most financial investments in general,” he noted.
Moreover, funds in this space allow investors to focus on absolute return without any significant increase in volatility. Krishnaswamy says these funds supplement the traditional portfolios of HNIs who now feel the need for unique strategies in their portfolios.
“A major advantage of these funds is that they allow these investors to diversify across the spectrum with added choices available depending upon their preferences. Traditional instruments like Mutual Funds have restrictions in terms of investments. Alternative funds fill these gaps in existing portfolios of these investors allowing them access to strategies previously not available,” Krishnaswamy added.