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Anything alternate to traditional form of investments i. e. stocks, bonds, fixed deposits or real estate gets categorized as Alternative Investment. Alternative investment funds are nothing but the investment schemes that allocate funds to financial instruments other than traditional investment options.
The term Alternative Investment Fund refers to venture capital fund, private equity funds, commodity funds, infrastructure funds, hedge funds etc. to name a few.
SEBI categorizes AIFs broadly into three categories. Schemes launched in first two categories necessarily have to be closed ended and the schemes launched in third category could be open ended or closed ended.
Category 1 Funds invests in a business / Start up at a very early stage, then this Category is good for you.
Investment is usually done in established business / late stage start ups / businesses which may look forward to listing on stock exchanges. Also invests in Bonds / Fixed income instruments.
Category 3 AIF usually invests in already listed stocks on Stock Exchanges.
FAQs on AIF
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AIF is an Alternative Investment Fund. As the name suggest, it is the fund established in India, that privately pools money from High-Net-Worth Individuals (Indian or Foreign) to invest, in accordance with rules & regulations of SEBI (Securities and Exchange Board of India).
Resident Indians, NRIs, and even foreign nationals as well, can invest in AIF.
AIF can be offered by the entities that are registered with SEBI (Securities Exchange Board of India). Registered entities have to follow the rules and regulations set by SEBI.
Minimum investment required in AIF is Rs. 100.00 Lacs (Rs 1 Crore).
To invest in AIF, every investor must fulfil the following criteria:
High potential returns, low volatility, & diversification are some of the benefits of AIF.
Category I & II shall be close ended funds, the tenure shall be determined at the time of application and shall be for minimum of three years.
The income under Category I or II AIF, would be a pass-through income, and investors will be taxed on their share of income of the AIF in the same manner as if they had made the investments directly.
Mutual funds are open for everyone (For retail or HNI investor). On the other hand, AIF is for a niche set of investors (High-Net-Worth Individuals). AIF invests in such alternatives in which Mutual Funds cannot invest such as unlisted companies. Hence, Mutual Funds are more standardized. AIF is having a high entry threshold (Rs 100.00 Lacs). AIF is only for those who has a high-risk appetite. On the other hand, conservative investors can also invest in mutual funds. Mutual funds are suitable every small investor as the retail client can start investment in MFs with as low as Rs. 500 per month.
AIF is for High-Net-Worth individuals who are looking for diversification of portfolio and increase long-term returns. Individuals who are willing to take higher risk, can consider AIFs as a decent investment alternative. Availability of investment, net worth, long term horizon, financial goals, and risk appetite are the deciding factor in choosing between Mutual funds and AIF.