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Edelweiss Insights Things advisors need to keep in mind before suggesting AIFs to clients

Things advisors need to keep in mind before suggesting AIFs to clients

Here are five key pointers that can help you in choosing the right AIFs for your clients.
Shreeta Rege May 11, 2018

AIFs are aim to generate an alternative stream of return for investors. Globally, AIFs have been in existence for quite some times now.

Compounding the challenge is the fact that not only are AIFs new but are also niche products with each fund following a very distinct strategy. Thus, investors may find these products too complex and may be reluctant to invest in them. The advisor plays a crucial role in bridging this knowledge gap.

Here are five important parameters to evaluate before recommending AIFs to clients

Understand different AIFs in the market

‘Alternative’ investment funds as the name suggests invest either in ‘alternative asset classes’ like real estate, private equity etc. or they employ ‘alternative strategies’ to manage traditional asset classes.

Broadly speaking, Category 1 and Category 2 diversify the return stream by taking exposure to less common assets/securities like start-ups, social ventures, real estate, private equity etc. Category 3 AIFs employs complex strategies to generate returns.

Even among these categories, no two funds take the same approach. Thus, you need to assess each of these funds carefully to understand how they generate returns and what the likely risks are. You can approach AMCs offering AIFs to get access to data on different strategies and schemes. Also, analyse the AIF’s product strategy and tax implications for the investor before exposing a client to the AIF.

Extensive due diligence

AIFs are relatively less regulated compared to traditional mutual funds. Thus, you need to evaluate the sponsor credibility, fund manager expertise and the fees charged.

Assess where AIFs fit in the client’s portfolio

AIFs are not a one-size-fits-all product. As an advisor, it is critical for you to understand how AIFs will complement your client’s portfolio. Offer an AIF only if a fund adds value or the fund follows a varied strategy that a regular mutual fund does not.

For instance, your clients can get access to a concentrated folio; say a portfolio concentrating only on NBFCs, which mutual funds cannot provide. In addition, AIFs can build a specific portfolio such as a fund, which follows for example, banks and consumption themes simultaneously.

Evaluate client’s ability to invest in AIFs

AIFs demand significant investment and require a certain holding period. Thus, you need to know the client’s future cash requirement. In addition, like all investments, AIFs can also post a loss. Therefore, you have to analyse the client’s ability to absorb loss.

Disclose compensation

AIFs come under the scanner frequently for offering advisors exorbitant compensation. However, in reality the higher compensation is in line with the extensive research required for recommending an AIF, which perfectly complements the investor’s goals. By disclosing the commission upfront, you can prevent any future misunderstandings.


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1 Comment
Neeraj · 10 months ago
There is confusion about taxation of these AIFs.

Pl write about tax issues that a client can face while investing
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