Alternative Investment Funds (AIFs) are gaining popularity among Indian HNIs. The rising popularity of AIFs among HNIs is evident by the growth in the commitment raised by AIFs. SEBI data shows that the commitment raised (equivalent to AUM in MF parlance) by AIFs has increased to Rs. 65,013 crore in the September quarter from Rs. 50,441 crore in June 2016. This growth was largely due to rising interest in Category I funds.
In this article, we will look at how Category I funds are structured and how they operate.
AIF - Category I funds
- Venture capital funds
- Angel funds
- SME funds
- Social venture funds
- Infrastructure funds
Where does each category invest?
- Venture capital funds invest in new products, services, technology or intellectual property or new businesses. Venture capital funds have a sub-category which are known as angel funds. Recently, SEBI has amended the (Alternative Investment Funds) Regulations to give more flexibility to angel funds. For instance, the regulator has reduced the lock in requirement for angel funds from three years to one year in a venture capital undertaking.
- SME funds invest in micro, medium and small enterprises.
- As the name suggests, social venture funds invest in companies or projects which work towards a social objective.
- Infrastructure funds invest in companies which handle and operate infrastructure projects.
How are Category I AIFs structured and how they operate?
- They are closed end funds and come with a minimum tenure of 3 years (can be extended by additional 2 years, subject to approval of unit holders of AIF)
- They can be listed on stock exchanges with a minimum tradable lot of 1 crore rupees.
- They cannot invest more than 25% in one company.
- They can invest in their own sub categories (venture capital, SME, infrastructure, social venture) but cannot invest in funds of funds.
- They are not allowed to borrow funds directly or indirectly to run their operations.
AIFs typically offer an upfront commission in the range of 2% to 3% to distributors depending on the type of AIF. However, the structure and quantum may vary from fund to fund.