People can invest in a variety of investment possibilities. Common investments fall into two categories: equity-oriented investments, which are market-linked and contribute to a company’s equity capital, and debt-oriented investments, which are not market-linked and invest in fixed-return instruments.
There are capital risks associated with equity-oriented investments, but there is also the possibility of a higher return than with debt-oriented investments. On the other hand, while there is no danger of losing the cash invested in debt-oriented ventures, there is no chance of earning a larger return than the pre-determined rate of return.
Although many classic investment instruments are accessible in both equity and debt categories, the majority of them have generalised investing patterns and individual investors have little said in portfolio compositions.
High Net Worth Individuals (HNIs) with substantial sums to invest, on the other hand, desire a voice in investment management to create greater returns by investing in specialty areas that are normally out of bounds for standard investment products owing to stricter regulatory constraints.
“Alternative Investment Funds are a way for people to combine their money to invest in private equity, real estate, or hedge funds,” explained Nitin Rao, CEO of InCred Wealth.According to Rao, AIFs are classified into three types:
• Category I AIFs are those that invest in start-ups or social enterprise funds, infrastructure funds, SME funds, and so on. This type of money is regarded as socially and economically feasible by the government or authorities.
• Category II funds do not leverage or borrow except to satisfy day-to-day operational requirements. Private Equity Funds and Debt Funds are the most common types of funds in this category.
• Category III funds are generally made up of Hedge Funds that use a variety of or sophisticated trading methods. AIF managers attempt to use leverage by investing in listed or unlisted derivatives.
“In general, having considerable prior expertise in running entrepreneurial funds and/or Mutual Funds, AIF fund managers tend to have greater experience than MF managers, bringing in superior management and innovation,” Rao added. As a result, AIFs provide HNIs the opportunity to earn higher returns through customised investments. AIFs, on the other hand, pose higher risks than MFs and other traditional investments due to fewer regulatory supervision and interventions.
“It should be emphasised that AIFs are riskier by nature, have a lock-in period, and require time for the strategy to play out. As a consequence, they are only appropriate for people who are prepared to wait for the creative subject to play out and bear the risk for such a long period of time. Investors should only invest in AIFs if their risk profile matches this expectation, according to Rao.
Rao warned HNIs about the greater risk element, saying, “In terms of allocation to AIFs, the total portfolio allocation to the underlying asset is crucial to bear in mind, but it would be smart not to go over 5% in a non-traditional AIF in a single name.”