The Alter-NATIVE series ABC of alternative investment funds

ABC of alternative investment funds

Let us discover what AIFs are.
Edelweiss Feature Jul 3, 2017

Alternative Investments germinated in India more than twenty years ago in 1996. However, they have truly come into their own only in the last half a decade. From 73 AIFs with total assets under management (AUM) of Rs. 14000 crore in 2013 to 288 AIFs with a total of AUM of Rs. 843000 crore in January, 2017, this investment avenue has witnessed exponential growth.

In India, alternative investments can be classified into three main categories. These would be:

Category I: these are typically venture capital funds, SME funds, Social venture funds and infrastructure funds which are close ended in nature and have specific investment restrictions. These funds are also not allowed to use leverage.

Category II: these are typically private equity funds, debt funds, fund of funds, and other funds not categorized in the above category. Similar to Category I, these are close ended, not allowed leverage and have specific investment restrictions.

Category III: these are typically long only equity funds and long/short equity funds. However, these can be open or close ended and have no restrictions on asset allocation. Additionally, they can also use leverage.

The Category III structure provides significant flexibility to an asset manager and can be a good source of alpha. We expect this alpha to persist over the next 10 years, for the following reasons:

  1. Explore opportunities both on the long and short side due to the presence of divergent trends in the market place.
  2. Emerging sectors with strong growth potential make for a compelling investment argument
  3. Relatively lower equity penetration

Operationally, similar to a mutual fund, the investment manager launches and manages an AIF scheme, which is supervised by a trustee company. However, they do differ from a taxation perspective. Category I and Category II AIFs have been accorded a tax pass-through status i.e., income of the AIF shall be taxed directly in the hands of its consumers. However, in cases where the income of the fund is characterized as income under the head “Profits or gains from business or profession”, the investment fund would be taxed in respect to such income at the maximum marginal rate of tax.

Past performance is not an indication of future performance. Investments in the securities market are subject to market risk.

Please read the Private Placement Memorandum carefully before investing.

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