-An article by Lavanya Goinka and Siddharth Sharma

A private pooled investment vehicle created or registered in India as a trust or corporation is known as an alternative investment. A legal organisation that is not governed by a company, limited liability partnership (“LLP”), SEBI, or other industry rules can raise funds from Indian or foreign investors and invest them according to specified investment criteria.

Alternative investment assets, in the broadest sense, are assets that aren’t part of a typical asset class that regular investors are familiar with, such as cash, stocks, or bonds. As a result, private equity real estate and private equity infrastructure funds, as well as secondary funds and private debt funds, are available as options.

The SEBI (Mutual Fund) Regulations of 1996 and the SEBI (Collective Investment Scheme) Regulations of 1999 exclude funds from the AIF. Family trusts established for the benefit of “relatives” as defined by the Companies Act are exempt from registration under the AIF Regulations.

Why AIF?

Entrepreneurs relied primarily on private placements, public offerings, and bank lending/FI for business expansion, financing, project finance, and other purposes before the establishment of the venture capital-private equity (VCPE) market in India, including numerous global firms. SEBI developed the Venture Capital Fund Regulation (VCF) in 1996 to bridge the gap between fast-growing companies’ capital requirements and traditional sources of funding such as banks, IPOs, and financial institutions.

Alternative investments, when added to traditional portfolios, help investors minimise overall volatility by increasing portfolio diversification, which is less connected with market standard investment movements like stocks and bonds.

Purposes of investing in alternative investments

· Risk reduction through diversified investment

The primary goal of alternative investing is to reduce risk through diversification. The lack of correlation between main traditional asset classes for public equities and bonds financial assets is one of the distinguishing characteristics of most alternative investments. Risk is reduced in portfolios that include a variety of alternative assets.

· Improved returns with alpha

The second key purpose of alternative investments is to boost the portfolio’s expected return by acquiring alternative assets with reasonable alpha expectations, or excellent risk-adjusted returns. Alternative investments, such as hedge funds and private equity, have been proved to provide opportunities. This permits alpha to be used to boost the risk-adjusted returns of a well-diversified portfolio.

· Direct tax benefits 

Alternative investments also come with tax advantages. The structure of many alternative investments allows you to keep more of your profit. You become a fund or syndication partner for many private alternative investments, so tax benefits are passed on to you directly.

The processing of future depreciation and long-term capital gains are the two key tax benefits. Depreciation (non-cash costs) is deducted from the net income of many real estate funds and syndicates, lowering their taxable income. Investing in oil and gas has a very favourable tax treatment in terms of depreciation and recovery.

Alternative investment cons

· Illiquidity

Alternative investments are typically secret and uncontrollable, making them extremely volatile. As a result, they are often exceedingly illiquid, with assets that are difficult to sell in cash when needed.

• The overall level of difficulty

Traditional investment funds are more complicated than alternative investment funds. There is a need for a higher level of due diligence. As a result, before you consider investing in these alternative investments, you should conduct a survey and learn about the potential risks and repercussions of the investment.

• Unregulated

The lack of regulation is a risk for alternative investments. These types of investments are not regulated and do not require any reporting. You could lose your money if the company that delivers the assets or investments goes bankrupt.

• The difficulty of valuing

Alternative investments are notoriously difficult to value, which makes rising prices and maintaining price transparency more challenging. So, while alternative investments have their advantages and disadvantages, they appear to be gaining in popularity among investors these days.

In India, the alternative asset business is booming.

India’s alternative assets industry, which is worth $43 billion in assets under management, includes private equity, venture capital, real estate, infrastructure, private debt, and hedge funds. With 221 private capital fund managers and 46 hedge fund managers based in India, the alternative assets industry is a small but growing sector.

In India, the majority of institutional investors (60%) invest in at least one alternative asset class. Private equity and venture capital (63 percent) and infrastructure are the most preferred asset classes among Indian investors (62 percent).

Market expansion

Between 2001 and 2015, more than $103 billion in venture capital and private equity was invested in Indian companies. Over 3,100 businesses were funded across 12 major industries, including those critical to the country’s development. The companies ranged in size from start-ups to well-established mid-sized firms. Foreign direct investment has accounted for a major portion of these investments.

While the hedge fund industry is well-established in North America and Europe, the Indian business is still young, with only 16 investors allocating to the asset class in the first half of 2017. Despite its small size, this is more than twice as many as in 2013, demonstrating how hedge funds are becoming increasingly important in investors’ portfolios to achieve their investment objectives. India’s policy on foreign direct investment (FDI) in real estate has increasingly liberalised over the years.

The number of institutional real estate investors in India has expanded in recent years, with 49 institutional investors typically allocating to the asset class in August 2017, up from 34 in August 2013.

As of August 2017, the market for India-based private real estate funds was at an all-time high, with 29 firms seeking $4.9 billion in capital commitments.

This is significantly more than the $1.0 billion goal established five years ago in August 2012, demonstrating that investment managers feel the Indian business has opportunity to grow.

Conclusion

There is no doubt that the AIF is gaining popularity in India, and that diversification and return enhancement may be achieved by properly studying and adding the AIF to one’s portfolio. Authorities must embrace industry expectations of following general global best practises, supporting on-shore fund management, and unlocking domestic capital pools through sectoral and regulatory intervention, among other things, if AIFs are to continue to expand in India.