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Essential things to consider while investing in Alternative Investment Funds


One must be wary of risk, regulation, and lock-ins associated with these investments.

Alternative Investment Funds (AIF) are a different set of investment options. They differ from regular conventional investments and asset classes such as debt, stocks, securities etc. AIFs don’t come under the purview of the Securities and Exchange Board of India (SEBI) mutual fund regulations.

AIF is a privately pooled investment vehicle that collects money from private investors, and usually includes private equity, hedge fund, venture capital, angel fund, etc. Experts say investors who want to diversify their portfolio can choose Alternative Investment Funds to invest in.

Anshul Gupta, Co-Founder at WintWealth, says, “Traditionally, alternative asset classes have been subjugated by institutional investors and high net worth individuals (HNIs), as they require clients to be comfortable with a certain portion of their portfolios remaining in long-term and illiquid opportunities.” However, he adds, “the time has been changing rapidly. Various personal investment/ alternative investment companies and start-ups are democratizing investment options for retail investors.”

Having said that, Covid-19 has also invariably changed the investment patterns. Experts say allocations are now likely to happen at three levels i.e. risk, asset, and product. An increase has been witnessed in allocations to alternative investments.

According to the latest data available with market regulator SEBI, the cumulative net investments made by AIFs at the end of March 2021 stood at Rs 2-lakh crore against Rs 1.53-lakh crore at the end of the previous fiscal.

Gupta says, “AIF’s can be great portfolio diversifiers and help mitigate risks, generate passive income as they offer safer yields, and not all but some are tax-efficient.” However, one must be wary of risk, regulation, and lock-ins associated with these investments.

Experts say these investments are more complex than traditional investment vehicles. Gupta further adds, “Even though the AIFs are not directly linked with the market, it is crucial to monitor market, credit, liquidity, counterparty, and operational risks.”

Here are some of the essential things to consider while investing in AIFs;

  • They are different from mutual funds in all aspects.
  • Each AIF will have a different degree of risk and return associated with it. This can be evaluated by looking at the past performance of the asset
  • It’s important to know all the costs involved – There is no regulatory limit on costs in AIFs as compared to the limits on the total expense ratio (TER) in mutual funds.
  • The taxation rules of the various categories of AIFs are different.

Every investment carries its benefits and risks. Industry experts say, while AIFs make for a lucrative investment, there is a major learning curve attached to understanding them. Therefore, it becomes crucial to invest through platforms that are transparent and can help one make informed decisions.

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