However, AIF investments are open only for those who can invest more than Rs 1 crore
There is a very good chance that you are already on your way to wealth creation by investing in either direct equity or mutual funds (MFs).
These products have provided a way to participate in the India story. But, how do you protect the downside in a falling market, and diversify beyond mutual funds?
The answer to the above question might lie in Alternative Investment Funds (AIFs). They can be used to dice and offer a very different data series that is not correlated to the markets.
Some of the more unique examples of what can be expected from AIFs are as follows
Long Short Funds:
These funds are geared towards absolute, consistent returns and try to outperform liquid and arbitrage funds.
Opportunities that open up through mergers, demergers, open offers, Rights Issues, Buybacks, Leveraged IPOs, etc. find a housing under AIFs.
Enhanced Equity returns with Hedging:
Here the fund manager is looking to get index returns at much lower risk by hedging at the opportune time.
This market has been quite cut off for most investors until now. In a world when business models are rapidly changing, it is imperative to have uncorrelated return series that do well in different types of markets be it bull or bear.
This is now is a $40 billion industry. To put this in perspective, we were at $3 billion in March 2014, putting it at a 70 percent YoY growth. However, caution should be taken to check the pedigree of management and the factors mentioned above as there have been occasions where AIF’s have been used as a vehicle to raise funds for investments but have been funneled as loans to investee/group companies.
The historical returns from these funds also have varied from 5 percent to 10 percent (low risk) to 18 percent (high risk) and it comes down to understanding the edge of the fund, expectations from returns, time horizons, underlying asset risk, liquidity provided (varies from 1 month to 36 months) and exit loads.
However, large AUM comes with complex taxation. Both Category I and II have pass-through taxation which improves transmission, unlike Category III where the new budget proposals will see an almost 42 percent taxation on all derivative income.
Further SEBI has mandated to keep a minimum investment of Rs 1 crore to ensure that only nuanced investors participate.
Mutual funds toh sahi hai! Lekin alternatives koh dekha hai?
This is a three-part series on Alternative Investments Funds. The author is Founder at One Tree Hill Wealth Partners.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.