Accounting Guru Ting Song's Impact on Alternative Investment Funds (2024)

FAQs

What is an AIF investment? ›

Alternative Investment Fund or AIF means any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.

Alternative investments typically don't correlate to the stock market, which means they can be used to add diversification to a portfolio and help mitigate volatility. Some can also offer tax benefits not available in traditional investments.

Alternative investments can include private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts. Real estate is also often classified as an alternative investment.

Traditional investments are easily tradable in the open market, providing high liquidity. Alternative investments, however, are often less liquid. They typically require a longer investment horizon due to lock-up periods or the nature of the asset class.

Liquidity risk: AIFs are typically less liquid than traditional investment funds, meaning it can be difficult to sell your investment quickly. Regulatory concerns: AIFs are less regulated than traditional investment funds, which can increase the risk of fraud and mismanagement.

Alternative Investment Funds vs Mutual Funds – FAQs

The key difference between AIFs and Mutual funds is that AIFs target affluent investors with higher risks and more complex strategies, while mutual funds are suitable for general investors seeking diversified, more stable portfolios.

Bar graph showing yield alternatives for asset classes. For direct lending, alternatives are at 11.6%, U.S. high yield fixed income is at 8.4%, commercial real estate mezz alternatives are at 8.1%, commercial mortgage loans-senior alternatives are at 4.4%, and U.S. 10-year treasury yield fixed income is at 4.4%.

Real Estate

Real estate is perhaps the most well-known alternative investment. Investing in real estate can provide ongoing cash flow and the potential for appreciation. Real estate generally has a low correlation to traditional investments such as stocks and bonds. Real estate investing can be done in several formats.

While institutional investors and endowment funds often invest much bigger chunks of their portfolios in alternatives, I'd argue that most individual investors should keep their alternatives exposure limited (which Morningstar defines as 15% of assets or less).

How do alternative investment funds work? ›

It is a privately pooled fund. Generally, institutions and HNIs invest in AIFs as substantial investments are required. These investment vehicles adhere to the SEBI (Alternative Investment Funds) Regulations, 2012. AIFs can be formed as a company, Limited Liability Partnership (LLP), trust, etc.

A mutual fund is a professionally managed investment fund that accumulates money from many investors to purchase securities who may be retail or institutional in nature. Mutual funds are listed in stock exchanges but due to its distinct characteristics it is not considered as an alternative investment fund.

Conducting performance appraisal on alternative investments can be challenging because these investments are often characterized by asymmetric risk–return profiles, limited portfolio transparency, illiquidity, product complexity, and complex fee structures.

Benefits of investing in alternatives

Because alternatives tend to behave differently than typical equity and bond investments, adding them to a portfolio may help to lower volatility, provide broader diversification, and enhance returns.

Alternative assets have the potential to give higher returns than traditional assets. Of course, these extra returns come at higher risk. Alternative assets typically have a lower co-relation with traditional assets.

AIF means any Indian investment vehicle that collects funds from sophisticated investors, whether Indian or foreign, for investing in accordance with a defined investment policy. Alternative investment funds are regulated by the Securities and Exchange Board of India (SEBI).

AIFs generally have a higher return potential than other investment options. The massive pooled amount gives the fund managers enough room to prepare flexible strategies for maximising returns.

According to SEBI, Alternative Investment Fund is for sophisticated investors. The risk involved is considered to be fairly high in these funds. However, when invested for a long period of time, the returns can also be higher.

PMS, AIFs and MFs have different investment objectives. PMS is typically used to achieve high returns for HNIs and institutions. AIFs can be used to achieve a variety of investment objectives, such as high returns, capital preservation, or diversification. MFs are typically used to achieve long-term growth and income.