Alternative investment funds in India

Overview

Alternative Investment funds are a new concept in India. This is present in regulation 2 (1)(b) of SEBI regulation, 2012. According to the definition, management of funds is done privately and funds are source by either national or by people of other nations. As for now, the funds are not covered under any regulatory body currently operating in India. The division is among 3 schemes namely

• Ist category
• IInd category
• IIIrd category

And the minimum amount needed to be in any category is Rs. 20 crores.

Types of Alternative Investment funds in India

The Category I alternative investment funds

In this case of investments, the majority of the funds are invested in the SMEs (Small and Medium Enterprises), early-stage ventures, social ventures including start-up ventures. As the investments are made in respect of helping businesses, the motive may not be to generate wealth. Some of the examples of Category 1 alternative investments could be angel funds, infrastructure funds, social venture funds, SME funds, and venture capital funds.

Category III

The unique class of private pooled funds that employ a range of complicated trading strategies including arbitrage, margin trading, futures and derivates trading, etc. The main aim is to generate returns. Investments in this category have the leverage to invest in listed and unlisted derivatives as specified by the SEBI (Securities Exchange Board of India). PIPE funds and Hedge funds are some of the examples falling under this category of investments.

(AIF) Category II

As per the regulations of the SEBI, any investments that don’t fall under either of the previously mentioned categories fall under this category of investments. Though there is no leverage option of borrowing to meet the requirements of returns, yet Category II AIF can borrow money to meet the financial requirements on day to day basis.

A complete list of Alternative Investment funds

Angel Funds (Alternative investment funds)

It falls under the subcategory of venture capital funds and included in the category I type of alternative funds. In this case, collections of funds are from the angel investors and investments are in the categories in line with the provisions under chapter III-AIF regulations. The minimum qualifying amount in this category of investors is the corpus of Rs. 10 crores. According to the existing rules and regulation, angel funds can ask for a minimum of Rs. 25 lakh of investment for a maximum period of 3 years.

Angel investors are those who invest in angel funds and also qualify any of the following conditions:

• An individual investor who has at least Rs. 2 crores of net assets. Including this, this person should have prior senior management experience, entrepreneurial experience or investment experience. The experience should be at least 10 years.
• Any corporate body with a net worth of at least Rs. 10 crores
• A registered VCF under SEBI regulations, 1996 or an AIF registered provisions of the SEBI (Alternative Investments Funds) Regulation, 2012.

Social Venture funds (Alternative investment fund)

This falls under the category I of the Alternative Investment Funds. In social venture funds, the investments are in the ventures that are beneficial by the government. Unlike other ventures (venture capitalists), the main aim is to benefit the people and at the same time generating profits.

Investments are by the venture philanthropy companies, non-profit organizations or social venture capitalists in general. Investments are in debt, equity and even capital investments. These investments are usually free from taxes as the investments are in various socially desirable ventures.

Tax charged on mutual funds

Venture Capital Funds (Alternative investment funds)

This falls under the category I of the alternative funds. The investments in the venture capital funds are in equity holding of the company. This is done only for the start-ups and not other long term operating companies. The investments are in small amounts and in numerous startups to ensure at least one of them getting successful in the long run. Thus, it offsets the losses incurred by other non-successful startups. High risk/high return is the main target of this type of investment.

Most commonly, the generation of returns for the investors is when the company (where the investment is made in) exits via merger, acquisition or IPO.

The generations of returns are when the company exits via merger, acquisition or IPO.

SME Funds (Alternative investment fund)

SME funds are funds which are held and sourced privately. Investments that are in SMEs are called as SME funds. They may or may not take interest in equity holding of the company and the investments are as a capital for setting up (in the case of the angel funds). Or private equity investments (like in the case of venture capital).

The criteria for these funds is that the source of investment should be private and the investments should be in SMEs (as per the government approved methodology).

Fund of Funds (Alternative investment fund)

Types of mutual funds in India

Debt Funds (Alternative investment fund)

This type of funds doesn’t come under the regulations such as the SEBI (mutual funds) regulations, 1996 and SEBI (collective investment schemes) regulations, 1999. The main investments are in debt instruments of listed and unlisted investee companies. These come under category II of the AIF, as it neither falls under category I or category III. It is also a condition that private investments should not provide loan to private companies or individuals.

Hedge funds (Alternative investment funds)

Falling under category III of the alternative investments. The investments are in complex strategies such as arbitrage, market, and derivatives trading, etc. to generate active returns to the investors. The aim of this strategy is to generate high returns and thus uses various tools to achieve this. However, high returns come with high risk associated with it so it’s suitable only to high risk-tolerant investors. Privately pooled investment of this category is usually available to HNI investors (both domestic and international).

Mutual Funds Benefits

PIPE funds (Alternative investment fund)

PIPE or Private Investment in Public Equity funds is a private investment of private source of funds into public equity investments. But how are equity funds evaluated? Investments are in public company. Traditional PIPE investors invest in company common or preferred stock available at a discount involving an equity purchase by the fund. But in the case of PIPE funds, a limited number of stocks are provided to a selected group of people through a private auction. In the case of structured pipe investments, the company issues preferred or common shares of convertible debt to the private investors.

Best debt funds to invest in 2019

Infrastructure funds

Just like infrastructure mutual funds, the investments are in the companies working in the development of infrastructure. Involvement of the companies may be with the manufacturing of building ports, bridges, making road and waterways, rural electrification, etc.

Choose Best Tax Saving Investment Option

The mutual funds are classified as thematic or sector funds, but in infrastructure funds, it comes under category I AIF. As the investments are in socially desirable projects, the funds (though pooled privately) are free from tax.

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