Evolving beyond traditional Asset Classes
As portfolios reach a certain scale, public market equities and fixed income are no longer enough to generate alpha or provide true diversification.
Mutual Funds/PMS
- Diversified exposure
- Complete public market exposure
- High liquidity
Bonds/Fixed Income
- Stability and Balance
- Best during volatile markets
AIFs
- Access to private markets
- Unlisted equity exposure
- Complex hedging strategies
What is an Alternative Investment Fund (AIF)?
An AIF is a privately pooled investment vehicle that collects funds from
sophisticated investors (Indian or foreign) to invest in accordance with a
defined policy.
It operates outside the traditional regulatory boundaries of mutual funds,
allowing for investments in real estate, private equity, startups, and
complex trading strategies.
The Need for Alternative Strategies
The limitations of relying solely on public market investments
Market Correlation
Traditional portfolios are highly correlated to global macro events. AIFs offer a shield through non- correlated asset classes
The Illiquidity Premium
Public markets are crowded. True multi-bagger value is often created in the private and unlisted space before an IPO. Examples: The shares of NSE, Zomato(Eternal), Zepto were available via AIFs in the pre- IPO phase itself, giving multibagger returns to the invested AIFs
Constrained Strategies
MFs and PMS are mostly "long-only." AIFs can use advanced strategies like long/short, leverage, and structured credit.
Core Advantages of Alternative Investment Funds
Exclusive Access
Entry into high-growth startups, private debt, and exclusive real estate deals not available to the general public.
Absolute Returns
Focus on absolute wealth generation rather than merely beating a benchmark index.
Deep Diversification
Portfolio protection through assets that do not necessarily move in tandem with the stock market.
The AIF Universe: Categories I, II, and III
Venture Capital, Infrastructure, and Social Venture fund(Investing in early-stage economic growth).
Private Equity funds, Real Estate funds, and Private Debt (The popular category, focusing on unlisted companies and structured most credit).
Hedge Funds and PIPE funds (Employing complex trading strategies, leverage, and derivatives in public markets).
Advanced Risk Management
Downside Protection
Use of derivatives, short selling, and hedging strategies (specifically in Cat III) to protect capital during market crashes.
Asset Backing
Cat II private credit funds often rely on hard collateral and structured cash flow mechanisms to secure returns.
Commitment and Capital Calls
Drawdown Mechanism
Capital is not deployed all at once; it is "drawn down" by the fund manager only when a lucrative opportunity arises, maximizing efficiency.
Long-Term Horizon
Lock-in periods (typically 3 to 7+ years) remove the pressure of short- term redemptions, allowing managers to build truly fundamentally strong businesses. We however suggest the AIFs based on the client’s time horizons and investment expectations.
Tax and Pass- Through Status
Category I and II
Enjoy "pass-through" status. The tax obligation passes directly to the investor, meaning the fund itself pays no tax, avoiding double taxation.
Category III
Tax is paid at the fund level, ensuring that the returns distributed to investors are post-tax, simplifying accounting for the client.
Hurdle Rate
Fund managers only earn their performance fee (carry) after delivering a minimum promised return (hurdle rate) to the investor.
High Water Mark
Ensures managers are not paid performance fees twice for the same growth, deeply aligning their financial success with yours.
Fee Structure: Driven by Performance
Who Should Invest in an AIF?
01. Sophisticated Investors
UHNIs, Family Offices, and Corporate Treasuries with a high risk-return appetite.
02. High Ticket Size
Minimum investment of ₹1 Crore (as per SEBI guidelines), ensuring a pool of serious, committed capital.
03. Patient Capital
Investors who do not need immediate liquidity and are willing to lock in funds for 4-6 years for superior alpha.