AIFs as an avenue for HNIs

As per SEBI, AIF means any 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 following a defined investment policy for the benefit of its investors.

You have three categories to choose from – Category 1, Category 2, and Category 3. In terms of risk, they carry higher risk compared to mutual funds. Mutual funds invest in regulated market securities – listed companies. However, AIFs are allowed to invest in unlisted companies and also use borrowed funds. Each category defines investment rules, and you can pick the category as per your risk profile.

For example, Category 1 funds invest in an early-stage startup. Category 2 Funds do not leverage or borrow, other than to meet the day-to-day operational requirements. They consist of Private Equity Funds and Debt funds. Category 3 uses high-risk investment strategies and is usually open-ended (unlike Category 1 & 2).

There is no second opinion that India is one of the fastest-growing economies in the world with a diverse business ecosystem. The startup ecosystem is well poised to drive digital adoption in India and will drive India’s growth in the current decade.

AIFs have provided a viable route to make investments in public and private infrastructure much more accessible to investors. Further, private credit and venture debt have become an important source of funding for startups and projects and bank loans are not easy to come by. Overall, macroeconomics presents a lucrative investment alternative for investors along with India’s growth. To put in some numbers to support the discussions – India has seen a record number of companies attain unicorn status in the last couple of years. Also, more and more startups are getting listed on the exchanges. These are strong indicators that the Indian market is moving toward maturity.

There are also options for absolute return funds, real estate funds, and funds using derivates. These provide additional options for HNIs.

The growing acceptance of AIFs will prove to be a main driver of private market investment opportunities for HNIs and UHNI capital allocation.

AIFs provide HNIs the opportunity to generate higher returns through customized investments. However, there are a few downsides to this investment option which we must discuss first. The regulatory control and intervention are lower with AIFs compared to MFs, and therefore there is an additional risk. However, as the investment option is becoming popular, it is expected that regulatory tightening will happen. Further, AIFs are allowed to take a higher level of risk.

Most AIFs have a lock-in, as returns can only be expected after a few years. These are suitable for HNIs who are ready to hold on to innovative themes to play out to generate higher returns and for whom liquidity is not a concern. At the same time, carry a higher risk with investments.

AIFs can be part of HNIs portfolio, but the percentage should be limited based on one’s risk appetite. Our experts at Right Horizons can help you understand which AIF category is best suited for you and how much allocation to have in it. Get in touch with us and start your AIF investing journey.