Alternative investment funds (AIF) are gaining popularity among Indian HNIs. A recent Wealth Report Asia Pacific released by Capgemini shows that HNIs have invested 18.4% of their investible corpus in alternative investments as on June 2016. This is just marginally less than their equity holdings which stood at 18.8%.
HNIs are defined as those having investable assets of US$1million or more, excluding primary residence, collectibles, consumables and consumer durables.
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 by 103% from Rs. 24,873 crore in June 2015 to Rs. 50,441 crore in June 2016. Since the minimum ticket size under AIFs is Rs. 1 crore, most investors investing in AIFs belong to HNI category.
There could be a number of reasons for the rising demand for AIFs. One could be lackluster performance of equity and physical assets like real estate and gold. Since equity market have delivered negative returns last calendar year, HNIs have moved to other asset classes like alternative investments. In fact, a few structured products in AIF space guarantee capital protection along with appreciation. HNIs are finding such schemes lucrative.
Karvy Wealth Report 2015 showed that the total individual wealth in alternate assets including Alternate Investment Funds (AIFs) stood at Rs. 41,960 crore in FY15, growing by 77% from the previous financial year. Another report called Top of the Pyramid 2015 released by Kotak Wealth Management said that 40% of ultra-rich preferred to invest in IT and e-commerce industry through PE investments and 39% of them preferred to invest through venture capital (VC) route. After technology, real estate and financial services were the second and third most preferred sectors for investments through PE and VC route, states the Kotak Wealth report.
Also, HNIs tend to chase stable returns which they expect to find in real estate AIFs. In addition, pass through taxation status given to category I and category II AIFs has helped the industry grow.
Currently, there are three types of AIFs Category I (startups or venture capital), Category II (private equity) and Category III (hedge funds) in India.
