Recently, the capital markets regulator SEBI introduced some amendments to the regulations for alternative investment funds (AIFs), the rules governing the functioning of AIFs.
These amendments were aimed at giving a little more flexibility to AIFs in terms of where they can invest their capital and easing the compliance process for AIFs.
Here’s everything you should know about AIFs and the new SEBI guidelines.
What are Alternative investment funds?
Alternative investment funds are pooled investment instruments catered towards high net worth individuals (HNIs).
These funds pool money from many affluent investors and invest that capital in alternative investment instruments, which broadly speaking, include anything apart from traditional instruments such as listed equity and debt.
AIFs invest money in instruments such as real estate, venture capital, private equity, hedge funds, etc.
Because these funds invest in alternative investment instruments, they are high-risk-high reward propositions and are a great way for HNIs to diversify their portfolios. Currently, the minimum investment limit for investing in AIFs is Rs. 1 crore.
What are the types of AIFs?
SEBI categorizes AIFs into 3 categories depending on the asset class that the fund invests in. These categories are the following:
- Category 1 AIFs: These include pooled funds that invest in start-ups or early-stage ventures, real estate, social ventures, or any other ventures that the government considers socially or economically desirable. Examples of category 1 AIFs include venture capital funds, infrastructure funds, Small and medium enterprise (SME) funds, etc.
- Category 2 AIFs: SEBI defines category 2 AIFs as funds that do not fall under either category 1 or category 3 AIFs. These include private equity funds, real estate funds, etc.
- Category 3 AIFs: These are funds that employ complex trading strategies and leverage in order to get higher returns on capital. For example, hedge funds.
What has changed?
In the amendments, SEBI has made some changes to the investment limits that apply to AIFs. Some of the important amendments include the following:
Going forward, Category 1 AIFs will have to invest at least 75% of the total investment corpus in either unlisted equity shares or in the equity of companies proposed to be listed on an SME exchange.
The remaining 25% of the capital has no restrictions and can be invested at the fund’s discretion. Earlier, there were limits on this 25% capital as well which have been done away with.
Category 3 AIFs are not allowed to invest more than 10% of the investible funds in the listed investee company either directly or using the investment in units of other AIFs. Category III contains various types of funds such as hedge funds, and PIPE funds to name some.
However, the large value funds can invest up to 20% of the investible funds either directly or using the investment units of AIF.
Last words
AIFs have become very popular in recent times. Given the limited investment options and low expected returns, many HNIs have included AIFs in their portfolios.
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