What are Alternative Investment Funds? Should You Invest In Them?
Alternative Investment Funds in India: An Overview
Alternative investment funds are alternate options for traditional investment (stocks, bonds, and cash). The alternative investment offers an 11-13% return to retail investors and these alternative investment funds in India offer returns that are way better than traditional investments. These are effective investment options that include a wide range of investment options and are not linked to the stock market or even the bond market. Investors can invest in alternative investment funds to diversify their investments. Also, it acts as an asset hedge. Investors who belong to HNI (high net worth individuals), family offices, and rich retirees use AIF funds to earn passive income and regular income. In this article, we are going to learn about what are alternative investment funds in India, the types of alternative investment funds in India.
What are Alternative Investment Funds?
Alternative investment funds refer to funds that include hedge funds, venture capital, private equity, angel funds, real estate, commodities, collectibles, structured products, etc. Alternative investment funds are an alternative to traditional investment options (stocks, bonds, and cash). investors can invest in AIF funds to diversify their investment and get benefits. Generally, investors having high net worth, retail investors, and individuals prefer to invest in AIF funds. However, they can not be bought and sold easily unlike conventional investments. The government is working to make these alternative investment funds a lot more transparent.
Top Alternative Investment Funds in India
- Hedge funds: Hedge funds are the type of alternative investment funds that collect money from investors to invest in equity markets that are highly risky, international debt and domestic debt. Since, hedge funds adopt an aggressive investment strategy, offer high returns to investors. Hedge funds fund managers charge a high management fee of 2% and 20% of the total returns earned annually. Generally, accredited investors with high net worth prefer to invest in hedge funds.
- Private Equity: Private equity funds invest in companies that are not listed on the public exchanges. Since private companies are not listed on public exchanges, they cannot raise capital from the public. So, they raise capital with the help of private equity funds. The investment period is considerably long. over the past 13 years, private equity funds have raised around $100 billion in India. Hence, they play an important role in the development of small and medium businesses.
- Commodity: Commodities are oil, grain, agriculture products, energy, metals, etc. These can be bought and sold. Investing in Commodities is a great way to protect against inflation because commodities price increases along with other goods when inflation increases. However, commodities markets are driven by some macroeconomic factors and are susceptible to market instability. So, investors should consider these factors before investing in the commodity market.
- Real estate: Traditionally, one can invest in real estate if they have a considerable amount of money ranging from a few lakhs to a few crores but with the advent of REITs (real estate investment trusts) investors can invest in real estate with as little as Rs. 5000 to Rs. 10000. Platforms like Strata, Prop share, etc allows investors to invest in real estate which includes commercial buildings and offices with a small amount of money. Investors can have fractional ownership in grade A properties such as commercial buildings or offices and warehouses. These properties have an existing tenant who pays rent every month which helps the owner of the property to receive regular cash flow. You can invest in real estate through REITs, real estate mutual funds, etc.
- Venture capital: Venture capital funds are types of funds that invest in startup companies that are in their early stages and need capital to expand and develop their business. India is one of the largest startup ecosystems in the world after the US and China. Hence, new entrepreneurs can get capital from venture capital funds. Venture capital funds put their money into small businesses and startup companies based on their characteristics, product development stage, and asset size of the company. The main objective of venture capital is to help the business to scale and help in the growth of products or services. Investors can earn returns based on what businesses a venture capital fund has invested in.
- Peer-to-peer lending: Traditionally, P2P lending was when Individuals deposit money in a bank to earn interest and the same deposited money is lent out to borrowers who will pay certain interest to the bank. The difference between the interest paid by the borrower and the interest earned by the depositors is kept with the bank. Banks have some terms and conditions such as who can borrow, how much one can borrow, and at what interest whereas Modern P2P lending does not include banks which means lenders and borrowers can earn more interest. There are many P2P lending platforms such as FAIRCENT, LENDBOX, LIQUID LOANS, etc that allow P2P lending. These platforms allow lenders to select their borrowers based on loan criteria, location, profile, reason for the loan, loan tenure, and rate of interest. Currently, they offer 18-22% net returns. However, P2P lending is associated with risk as there is always a chance of the borrower defaulting. So, investors should do their research before investing in it.
- Angel funds: Angel funds are a type of alternative investment fund that pools money from a number of investors that are interested to invest in new businesses that are at the early stage. when the new businesses become profitable, investors receive dividends. Angel investors help businesses to grow and become profitable.
To conclude, these alternative investment funds provide an alternate way to earn passive income. However, Investors need to do proper research about the platform, never go blindly by the interest rate the alternative investment has to offer and assess the alternative investment funds option carefully before investing in it. Do not concentrate your investment in a single alternative investment fund; rather, you can diversify your investment across different asset classes and start with a smaller amount of money to start investing in alternative investment funds in India. Before investing in any financial instruments, understand what type of investor you are, your risk appetite, financial goals, and the time horizon of your investments.
What are AIFs?
AIFs also known as alternative investment funds are investment vehicles established in India to collect funds from investors.
Who should invest in alternative investment funds?
Investors who want to diversify their investments across different asset classes can invest in AIF.
What is the minimum amount required to invest in alternative investment funds?
Generally, the minimum amount required to invest in AIFs is 1 crore but in the case of angel funds, investors can invest with Rs. 25 lakhs.
Can I earn more returns from alternative investment funds than mutual funds?
The objectives of alternative investment funds are different from mutual funds. Mutual funds are less risky than AIFs.
Does SEBI (the securities and exchange board of India) regulate alternative investment funds?
SEBI does regulate AIFs.