AIF (Alternative Investment Funds) is a privately pooled vehicle that invests in other possible assets such as private equity, infrastructure funds, real estate, venture capital, etc. India is adapting more to AIFs (Alternative Investment Funds) compared to traditional mutual funds as this industry is expanding rapidly. Let’s find out how to choose the right AIF for your portfolio.
Understanding AIF (Alternative Investment Funds)
An alternative Investment Fund (AIF) is a collection of funds that are privately pooled investments from sophisticated investors, both Indian and foreign. For the profit of investors, these funds are then invested according to the investment policy. AIF gives freedom to explore a wide range of investment strategies, unlike traditional investment options such as mutual funds. For participating in any AIF in India the minimum funding should be of 1 cr. You can pick out the best stock trading app to choose the right alternative investment funds.
Understanding AIFs Category
The AIFs can be categorised into 3 categories.
1. Category I AIFs: This category is suitable for investors willing to invest in emerging businesses, SMEs and other feasible businesses with potential growth. They are also suitable for sectors which are considered socially or economically beneficial by the government or regulators that fall into these categories.
2. Category II AIFs: Investors looking for stable and long-term investments can seek this category for direct ownership in private entities. This mainly includes equity and debt funds to reduce the risk factor for investors.
3. Category III AIFs: This category is for investors who engage in complex and diverse trading strategies. Debt or leverage can be used for investment in derivatives for both listed. Funds that trade for short-term profit fall under Hedge funds typically fall under this category.
Key Considerations for Choosing the Right Alternative Investment Fund (AIF) for your Portfolio:
Here are some key considerations for choosing the right Alternative Investment Fund (AIF) for your portfolio:
- Understand your investment goal: Determine your investment goal and risk tolerance. Then select an AIF that is compatible with your objective. Also decide if you are looking for regular income, capital gain, or a balance of both.
- Account setup and accessibility: Before investing in an AIF, you’ll need to open a Demat account. This digital securities account is essential for holding and trading various financial instruments, including AIF units. When selecting an AIF, consider how easily you can manage your investments through your Demat account. Some AIFs may offer more seamless integration with online trading platforms, making it easier to monitor and adjust your portfolio as needed.
- Analyse fund historical performance: During various market conditions evaluate funds performance, consistency and returns. Also, Keep in mind that past performance does not guarantee future results.
- Fund management: Look for an experienced fund manager and research their investment strategy, performance history, and alignment with your objectives. Ensure they have the expertise to execute the stated strategy.
- Fee structure: Understand the fund structure, liquidity terms, and all associated fees. Ensure the costs are reasonable given the services provided. Be aware of all fees involved, including management fees, performance fees, and expenses.
- Regulatory Compliance: Ensure that the Alternative Investment Fund (AIF) is duly registered and adheres to all applicable regulations within your jurisdiction.
- Diversification: Consider how the AIF would fit into your overall portfolio in terms of asset class, sector, and risk exposure diversification.
Why Invest in AIFs?
AIFs offer a range of benefits to investors. Here are the top reasons to invest in AIFs.
- Investment Diversification: Investors can get exposure to different sectors beyond the traditional way of investing through AIFs. They provide a range of investment avenues when it comes to unconventional strategies and asset classes.
- Investment Club for Exclusivity: AIFs provide focused investment avenues. If you are interested in adding unique and non-correlated assets to your portfolio you can invest in an AIF.
- Strategic Innovation: AIFs are generally very innovative in strategies that they deploy and often return more than regular products. AIFs can be an option if an investor wants to take significant risks for potentially high returns.
- Provisions for Urgent Requirements: Times of crisis are always considered in alternative investment funds and they can adjust their strategies. These funds offer the strategic advantage of greater strategic flexibility.
Also Read: Diversifying Investments with US Equities: A Path to Better Portfolio Stability for Indian Investors
Conclusion
Investing in alternative investment funds can be lucrative. However, due diligence and careful consideration are very essential while investing in an AIF. This due diligence will not only aid you in making relatively informed investment decisions but also in constructing a well-diversified portfolio according to your ability and willingness to take the associated risks. As with any type of investment, the value of investments may rise or fall. Hence, investors must research thoroughly and invest in the AIFs that suit their investment objectives.
