An Alternative Investment Fund (AIF) is a financial asset that does not fall into one of the conventional investment categories. Conventional categories include stocks, bonds, and cash.
AIFs are collections of pooled investment funds that include private equity or venture capital, hedge funds, art and antiquities, commodities, and derivative contracts. Real estate is also often classified as an alternative investment.
These are effective investment options that include a wide range of investment options and are not linked to the stock market, or even the bond market.
AIFs, generally, interest institutional investors, retail investors, and high net worth individuals (HNI) because they are complicated, lack regulation, and have a high degree of risk.
The alternative investment offers an 11 to 13% return to retail investors and these investment funds in India offer returns that are way better than traditional investments. On the contrary, these funds are a lot riskier than the traditional investment options.
These investment options can accumulate funds from both, Indian and foreign sources.
To form an AIF, one can seek registration in three broad categories:
Category I: These AIFs can invest in start-ups, early-stage ventures, social ventures, SMEs, and sectors that the government or regulators consider as socially or economically desirable. They include venture capital funds like angel funds, SME funds, social venture funds, infrastructure funds, etc.
Category II: These AIFs are those which are not classified under Category I or Category III. Various types of funds, such as real estate funds, debt funds, private equity funds, funds for distressed assets, etc, are registered under this category.
Category III: These AIFs use complex or diverse trading strategies like hedge funds.
No scheme under AIF is permitted to have more than 1000 investors, except in the case of an angel fund. For an angel fund, no scheme shall have more than 49 angel investors.
An AIF cannot make an invitation to the public at large to subscribe to its units. It can raise funds from sophisticated investors only through private placement.
At least ₹20 crore corpus should be there for each scheme of an AIF. In the case of an angel fund, it shall have a corpus of at least Rs.10 crore.
AIFs, other than angel funds, also cannot accept an investment of value less than Rs. 1 crore from an investor. In the case of investors who are the employees or directors of the AIF or employees or directors of its manager, the minimum value of investment shall be Rs. 25 lakhs.
Hedge funds, private equity investment, commodity investments, real estate, venture capital, peer-to-peer lending, Angel funds, etc. are some of the very popular AIFs operational in India.
The Indian AIF industries stood out at Rs.7 lakh crore till 2022 an incredible 7X growth in the past five years.
In India, AIFs are built on the foundation of retail HNI, or Ultra-HNI money. Almost 80 to 90 percent of AIFs raised today are from domestic investors.
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