While the alternative investment funds (AIF) industry has seen steady growth, the Category III AIF has witnessed constant decline in commitments raised.
The latest SEBI data shows that the commitments raised (equivalent to AUM in MF parlance) by AIFs has increased to Rs.4.41 lakh crore in December 2020 from Rs.3.47 lakh crore in December 2019.
Meanwhile, Category III AIF has witnessed a 3% decline in its commitments raised to Rs.46,824 crore in December 2020 from Rs.48,151 crore in the corresponding period last year.
Category III AIFs more popularly known as long only funds and long and short funds employ diverse or complex trading strategies and undertake leverage to a great extent. They use arbitrage, derivatives trading, futures and margin trading strategies. Also, they have open ended funds as well.
Nalin Moniz, CIO-Alternative Equity, Edelweiss AMC pointed out that a few close end long only and long short funds have matured in the last one year. “There have been redemptions in Cat-III AIFs because of maturity of a few closed ended schemes. I believe this is just a temporary phase and money will flow in again in a while,” believes Nalin.
However, redemption is not the only concern. Category III AIFs do not have pass through status and are taxed inefficiently at the highest tax slab (42.7%).
Pass through status means income accruing from funds is taxed at the investor level and not the fund level. Currently, category III investors have to pay tax twice – at fund level and individual level.
Meanwhile, category I and category II are pass-through vehicles, which means the fund doesn’t have to pay any tax at fund level.
Jay Shah, Founder, pmskart.com, a PMS and AIF research website, said that it is difficult to make money in Category III due to their inefficient tax rule which makes it less attractive for investors.
PMS AIF World data shows that a few Cat III funds have delivered exemplary returns in the one year. The data shows long only funds like Roha Emerging Companies Fund, Abakkus Emerging Opportunities Fund, Emkay Investment Emerging Stars Fund and Abakkus Growth Fund have delivered returns in excess of 100% in the last one year.
Delhi MFD, Shobhit Gupta of Moneygain Consultants said that many HNI investors prefer long only funds. He said that HNIs look for some unique proposition in the fund like arbitrage, pre-IPO and mergers & demergers before investing in such funds.
