Alternative Investment Funds (AIF’s) usually differ from regular conventional modes of investments(asset classes) like stocks, debt securities, etc. AIF is a privately mutual investment vehicle that collects money from sophisticated private investors. AIF’s includes private equity, venture capital, hedge fund, and angel fund.
Also, AIF’s don’t come under the authority of Securities & Exchange Board of India (SEBI) mutual fund regulations. Investors who wish to diversify their investments can choose AIF’s to invest in. However, AIF in India has its regulation, under regulation 2(1)(b) of the Regulation Act 2012 of SEBI.
SEBI classifies AIF’s under 3 broad categories Namely Category 1 AIF, Category 2 AIF, & Category 3 AIF. Each one of these categories has different investments broadly categorized as private equity, venture capital & angel fund, etc.
Who are eligible to invest in AIF?
All Indians individuals, Non- Resident Indians(NRI’s), and foreign nationals can invest in AIF’s. Also, there is a limit on investment by investors. The minimum investment allowed is ₹1 crore, whereas, for directors, employees & fund managers of the AIF, the minimum limit is ₹25 lakhs. Moreover, it is mandatory to know that AIF’s have a minimum lock-in period of 3 years. Category 1 and Category 2 AIF’s are the close-ended funds while the Category 3 AIF’s can be either closed and open-ended.
Some of the reasons why one should invest in AIF’s are –
AIF is a good option for portfolio diversification. The performance of AIF’s depend on the performance of the stock market. With AIF’s, the investor portfolio becomes more resilient, less risky, and less volatile to market variation.
Most of the AIF’s are comparatively less volatile than stocks. Hence these are a good choice of investment for one who is looking for portfolio stability.
Alternative Investments offer significant returns & outcomes in comparison to those traditional investments.
AIF’s can be a good source of passive income for investors.
Taxation rules for AIF’s
As AIF’s are privately pooled investment vehicles. Taxation rules for each category are different.
Category 1 & 2 are pass-through vehicles. These funds don’t have to pay any tax on their earnings. However, the investors have to pay tax according to their tax slabs. If the fund has Capital Gains on stocks, then the investors have to pay 15-10% depending upon the holding period.
Category 3 is taxable at the higher Income tax slab level (42.7%) at the fund level.
AIF allows investors to participate in Initial Public Offer & pre-IPO events as institutional investors. The fund may invest in equity-related investments to be listed in companies as per AIF’s offer document.
It is the best option for investors who are looking for higher returns, on investment opportunities.
According to the latest data, the cumulative net investment made by AIF’s at the end of March 2021 stood at ₹2 lakh crore against the ₹1.53 lakh crore at the end of the last fiscal year.