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Edelweiss Insights Should you recommend AIFs to your HNI clients?

Should you recommend AIFs to your HNI clients?

With the markets at all-time high, investment in AIFs may provide HNIs and UHNIs an efficient diversification tool.
Shreeta Rege Apr 11, 2018

Sipping a morning cup of chai while reading your favourite newspaper, you come across yet another article on the growth in alternative investment fund industry. The numbers are certainly appealing. An increase of 116% (Y-o-Y) as of December 2017 means that the industry has more than doubled in the last one year.

You think about the client base, mainly HNI and UHNI clients, as these instruments require a minimum investment of Rs.1 crore. You may wonder if these funds would add value to your clients’ portfolio.

We spoke to a few industry experts and IFAs to solve this dilemma. Here is what they have to say.

AIFs provide an investment opportunity to HNIs even in declining markets. “Globally, people allocate 10-12% of their assets to AIFs with the view to generate superior risk-adjusted returns. Hedge funds, a sub category in AIFs, aim to deliver positive returns for their investors even in falling or range-bound markets. These funds offer an attractive risk-return balance to the investor’s portfolio,” says Andrew Holland, CEO - Avendus Capital Alternate Strategies.

Nalin Moniz, CIO - Alternative Equity of Edelweiss Asset Management believes that IFAs can add value to their clients’ portfolio by offering them AIFs. He says, “AIFs offer investors access to new asset classes such as venture capital, infrastructure, real estate, private equity and commodities.”

Vishal Dhawan of Plan Ahead believes that AIFs provide flexibility to fund managers. In mutual funds, the funds are index linked which is not so in case of an AIF, he says. “AIFs such as hedge funds offer the best value proposition to investors. As AIFs follow strategies dissimilar to mutual funds, they act as a healthy complement to traditional equity products in the portfolio,” he adds. 

Vikas Gupta, CEO and Chief Investment Strategist at OmniScience Capital feels that mature investors having investible assets of over Rs.10 crore and understand both the return potential and inherent volatility in markets can consider investing in AIFs. Comparing AIFs with MFs, he said that mutual funds typically hold 50 stocks in a diversified scheme. However, investors can get access to a concentrated folio in AIFs. In addition, all AIFs have skin in the game, he added.

Skin in the game is when fund managers and sponsors invest in schemes, which they run for investors. Though there is skin in the game in mutual funds also, it is concentrated in liquid investments, Gupta says.

Another benefit is here you can pursue a niche strategy. For instance, you can run a portfolio concentrating only on NBFCs, which mutual funds cannot provide. In addition, you can build a specific portfolio such as a fund, which follows say, banks and consumption themes simultaneously, Gupta adds.

Currently, IFAs can earn commission in the range of 40-60% of the management fees on AIFs.

With the markets at all-time high, investment in AIFs may provide HNIs and UHNIs an efficient diversification tool. 

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