De-jargoned: Alternative investment funds

There are three categories of AIFs depending upon on their effect on the economy

While presenting the Union budget for financial year 2016, the finance minister announced that foreign investments will be allowed in alternative investment funds (AIFs). This was cheered by all associated with the AIF industry, which is in its early stages in India. The finance minister also announced that the government will do away with the categorization of foreign portfolio investors (FPI) and foreign direct investments (FDI) for this purpose, making it much easier for foreign investors to invest in AIFs. The announcement is expected to give a boost to the industry and bring in more flows.


AIF as an investment vehicle was established to pool in funds for investing in real estate, private equity and hedge funds. Till now, in India, pooling of capital was allowed only for Indian investors, and investment was done according to a pre-determined policy. However, selectively approval route for investment was used by overseas investors and non-resident Indians (NRIs). AIFs are primarily aimed at high net worth individuals, and according to the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, the minimum investment from an individual is 1 crore. The overall corpus of the AIF should be at least 20 crore and there should not be more than 1,000 investors at any point in time. Also, the fund manager or promoter should have contributed at least 2.5% or 5 crore, whichever is less, to the initial capital.

There are three categories of AIFs depending upon on their effect on the economy. Category-I AIFs have a positive spillover on the economy and may get concessions from the regulator or the government. These include venture funds, social venture funds and infrastructure funds, among others. Category-II includes private equity funds and debt funds and do not get any concessions. These cannot raise debt for investment purposes, but can do so to meet their day-to-day operational requirements. Category-III includes hedge funds, and are usually traded to make short-term returns.


Now that foreign investors are allowed to participate in AIFs, it is expected that these funds will attract investments from NRIs and overseas institutions. The merger of FDI and FPI will minimize the administrative bottlenecks of investing and increase the flow of long-term capital. The procedural ease will also give confidence to global investors. Also, along with category-I, category-II funds have been given a pass-through status. Now the end-investor has the tax liability, while the private equity and real estate funds will have more money.


With foreign money coming in, the AIF industry in India, which has doubled in the past one year, is expected to leap forward. With long-term money coming into unlisted securities, which was not the case till now, these funds may see accelerated growth. This will also give a boost to investments in the country. Domestic investors may now expect better returns from investments in AIFs.