How Are Alternative Investments Rising In India?

Are you looking  for better investment opportunities with lucrative Return on Investments (ROI)? Alternative investments might be just right for you. 

Traditional investment preferences for Indians used to be bank deposits, mutual funds, equity investments, gold, and conventional properties. However, with the new age  Indians, investments in newer assets such as angel investing, invoice discounting, social venture capital funds, infrastructure funds, revenue-based financing, crypto investing, NFTs, etc. have increased. According to SEBI, alternative investments reached Rs. 6.4 lakh core commitments as of March 2022. This is a 35% increase in alternative investments over the year, even though pandemic restrictions were still in place. 

What Are Alternative Investment Funds (AIFs)?

Alternative Investment Funds (AIFs) are investment vehicles that collect private funds for investing depending on the SEBI-defined policy, and these investment policies benefit the investors. AIFs adhere to the AIF regulations, 2012, created by SEBI. As of May 2022, SEBI has allowed more than 900 AIFs to be registered. The capital commitments have increased at 63% CAGR from 2012 to 2022. 

AIFs can be subdivided into three categories:

• Category I of AIF – Venture capital funds, social venture funds, SME funds, angel funds, and infrastructure funds that invest in start-ups, SMEs, and other infrastructure regions come under this category. 
• Category II of AIF – Private equity funds, real estate funds, debt funds, distressed assets, and funds of funds that don’t leverage on anything except everyday operational needs come under this category. 
• Category III of AIF – Hedge funds and Private Investment in Public Equity (PIPE) funds that involve leverage and complex trading tactics for public and unregistered derivatives investing come under this category. 

Why Are AIFs Gaining Popularity?

Conventional investment products lack the innovation and versatility that modern-day investors are interested in. Instead of trading securities, investors are looking for interesting trading options. AIFs are now themed and curated, and these differentiated offerings are managed boutique style. Many alternative investment options provide more returns with higher inflation. There is reduced risk and better diversification with AIFs.  

Previously, innovative investment options were only available to high net worth individuals (HNIs) from their investment management firms. However, the modern technology-driven platforms and the rise of fintech companies have made AIFs accessible to the common public. This is why the AIF industry has doubled to reach $72 billion in the past five years. 

Investors are now interested in private markets, private debt, and private equity that have more potential to increase risk-adjusted returns. AIF provides more customization and flexibility that are otherwise unavailable with traditional products. Unlisted assets face problems in managing liquidity. However, large exits in the start-up ecosystem are becoming increasingly common with more access to IPOs and buyouts. As with any investment opportunity, the outcomes of AIF investments are not always positive, but the market is maturing at a steady pace. 

Why Investing In AIF Is Good For You?

SEBI wants to ensure that only investors who can understand the risk potential invest in AIFs thus, the minimum limit for AIF investment is set at Rs. 1 crore. AIF investments are open to Indians, foreign nationals, and non-resident Indians. There is a three-year lock-in period for AIFs. 

Some of the benefits of investing in AIF are:

• Low volatility as they are not related to stock markets
• Diversification through the private market
• Higher return potential with reduced return fluctuations
• A better source of passive income stream
• Direct ownership of private assets
• Direct tax benefits 

Before investing in AIFs, investors must understand that liquidity is restricted with AIF investments. Investments are locked to the assets, and thus, liquidating the assets takes time. There is always a lock-in period for the investment. However, AIFs are great investment options for active, passive, and income-focused investors. 

Future Of AIF Investments

Currently, AIF investors are benefiting from offering debt to corporate companies in terms of leasing, invoice discounting, corporate loans, etc. Experts predict that the Indian market is becoming mature for potential investment increase in exotic products such as agricultural products, artworks, farmlands, shows, collectibles, and more. The introduction of metaverse investments and blockchain technology to trace back ownership can open up new innovations in AIFs with increased transparency and product visibility. Sophisticated investors with a high-risk appetite and a deep understanding of various asset classes can benefit greatly from AIF investments. Globally, the AIF industry is projected to grow by 20% by 2025, with emerging markets contributing as much as 50% of the asset growth.