WITH THE NUMBER OF wealthy people and affluence on the rise, investors have become increasingly demanding and need innovative offerings which have a differentiated and boutique style of managing risk and reward. Traditional investment platforms, however, face issues with respect to categorisation post regulatory overhaul, limiting product innovations and alpha generation capability owing to size and other factors. This is where Alternative Investment Funds (AIFs) can play an integral role. AIFs provide an opportunity to access curated products that might not be available in the mutual fund space.
Over the last decade, AIFs have been at the forefront of novelty and innovation for a new class of investors seeking a unique style of offerings and differentiated approach to traditional investment options of risk-reward. AIFs provide access to diverse products not only limited to traditional debt and long-only equity, but also exposure to start-ups, venture capital funds, early stage, or growth-stage products, including private equity, pre-IPO funds, funds with hedging capabilities, structured debt, etc.
The AIF industry has the potential to become as large as the MF industry in over a decade. Earlier AIFs were primarily an extension of MFs or Portfolio Management Schemes. Now more boutique fund managers are coming into the CAT-II & CAT-III space with more innovation and diverse product offerings to cater to sophisticated ultra-high net worth individual (HNI) investors and single-family offices.
A case in point is that while there are 51 mutual fund houses in the country, the number of AIFs registered is over 1,000.
This also brings its own set of challenges with respect to product, category, and manager selection, especially given the lack of public data available for analysis and comparison.
To the audience for AIFs, investment performance is critical. Boutique players who are nimble, innovative and deliver well on risk reward have an advantage.
However, AIFs carry additional risk/volatility, illiquidity, lock-in periods and need time for the strategy to play out. The minimum investment limit in an AIF is ₹1 crore since the regulator wants only sophisticated investors who understand the underlying risk of such kind of investments. Hence, these funds are mainly intended for investments from HNIs and institutional investors who are willing to wait for the innovative theme to play out and carry the risk. They are termed as privately pooled investment vehicles and must raise funds through private placements only.
With the introduction of the concept of Accredited Investor by the Securities and Exchange Board of India (SEBI), AIF can witness flows as this new class of investors will have the flexibility to participate with investment amounts less the minimum amount required according to AIF regulation.
With the growth opportunities that India offers, especially the action in the entrepreneurial space, AIFs are well poised for a growth trajectory.