Nowadays, many investors who hold the status of Person of Indian Origin (PIO), Non-Resident Indian (NRI) and Overseas Citizen of India (OCI) are increasingly willing to invest in an AIF.
What is AIF?
As per SEBI’s definition, an AIF is a “fund established or incorporated in India, which is a privately pooled investment vehicle, that collects funds from sophisticated investors, whether Indian or foreign, for investing it by a defined investment policy for the benefit of its investors.”
AIF does not come under the purview of SEBI’s mutual fund regulations. It is a private investment fund that invites investors from home or abroad to invest in their venture. Venture capital funds and hedge funds are some examples of AIFs.
What are the categories of AIF?
Technically, AIF is separated into the following three categories:
- Category I AIF
- Category II AIF
- Category III AIF
This category includes the funding sourced by start-ups, early-stage venture capital projects, funds required for small and medium sized enterprises, infrastructure projects and other sectors, which will have a positive influence on the economy, as per the government or regulators. Category I AIF includes the following funds:
- Venture capital funds (including angel funds)
- SME funds
- Social venture funds
- Infrastructure funds
- Other AIFs specified under SEBI regulations.
An AIF that resorts to leverage or borrowing funds for meeting its day-to-day requirements or for activities permitted under SEBI regulations 3(4)[b] comes under this category. Real estate funds, private equity funds (PE funds), and funds for distressed assets are registered as Category II AIFs.
Category III AIF:
- As per SEBI regulations, Category III AIFs are that which employ different trading strategies like arbitrage, margin trading, futures, and derivative trading. This category can make investments in both unlisted and listed derivatives through leverage as per the SEBI (Alternative Investment Funds) Regulation, 2012.
- An example of Category III AIF is a hedge fund.
Category I and II AIFs are close-ended funds with a minimum lock-in period of three years, whereas Category III AIFs are open-ended funds.
Can NRIs, PIOs and OCI invest in AIFs?
AIFs accept investments from all Indians, including NRIs, PIOs, and OCIs by issuing units. The fund may have restrictions in some geography as per the AMC compliance policy. Investors need to meet the following eligibility requirements before investing in AIFs:
- The minimum corpus for AIFs is Rs20cr, and if it is through angel investors, the minimum corpus is only Rs10cr
- The maximum number of investors for each scheme is 1000
- The manager or sponsor should have a continued interest for Rs5cr or less than 2.5 % of the initial corpus
What does not come under the purview of AIF?
AIF does not recognize the following trusts or companies:
- Family trusts
- ESOP trusts
- Employee welfare trusts
- Holding companies
- Other special purpose vehicle like securitization trusts
- Registered securitization companies or reconstruction company funds
- Any fund governed by other Indian regulators
How does AIF differ from PMS and MFs?
|FEATURES||ALTERNATIVE INVESTMENT FUND||PORTFOLIO MANAGEMENT SERVICES||Mutual funds|
|Categories||AIFs come in three categories like Category I, Category II, and Category III.||PMS provides discretionary and non-discretionary services to their client. In discretionary services, the PMS manager has to seek the approval of the investor before investing, and in non-discretionary services, the deciding power rests with the manager.||Mutual funds are of different types like sector funds, equity funds, debt funds, and balanced funds, among others.|
|Funds||Funds are pooled together for investment in different types of investments like hedge funds and derivative strategies, among others.||The PMS does not allow for pooling funds, and the PMS manager has to create separate accounts for every investor.||An Asset Management Company (AMC) manages the investor's funds by allotting them units of the mutual fund. The investor can also directly invest in mutual funds.|
|Corpus||The minimum corpus is Rs20cr and Rs10cr in case of angel investors.||Every investor has to meet the minimum threshold of Rs25 lakhs.||Mutual fund investments can be started with as low as Rs500.|
|Manager's contribution||AIF managers should have a vested interest of Rs5cr or less than 2.5 % of the initial corpus.||There is no need for any participation from the manager.||The mutual fund manager manages the fund and receives a commission for managing the fund's investments.|
|Number of investors||The maximum number of AIF investors is 1000.||There is no such stipulation.||There is no such stipulation.|
|Regulations||AIF is regulated by the SEBI (Alternative Investment Funds) Regulations, 2012||PMS is monitored by the SEBI (Portfolio Managers) Regulations, 1993.||AMC is regulated by SEBI or by RBI if the AMC is promoted by the bank.|
|Investment horizon for capital appreciation||3 to 10 Years||2 to 5 Years||1 to 10 Years|
How AIF is better than PMS and MFs?
AIF allows investors to actively participate in IPO and pre-IPO events as institutional investors. The fund may invest in equity and equity-related instruments to be listed in companies as per AIF’s offer document. AIF is almost the same as mutual funds as the investors are allotted units, but AIF follows a predefined strategy for long term capital appreciation. In PMS, an experienced fund manager will take decisions on behalf of the investor. However, AIF has the flexibility to leverage and arbitrage and adopts different practices for making concentrated bets and taking a high risk. It is a better option for investors who are looking for high returns investment opportunities.
As per SEBI regulations, AIF is an organized body like LLP (limited liability partnership), corporate body, company, or trust. The NRIs, PIOs, and OCIs are eligible to invest in AIFs subject to certain restrictions and by adhering to the conditions laid down by SEBI.