Avarice may be a bad thing, but we have no shame in saying that it is not one of those times.
More than ever before, investors have fearlessly marched onto the battlefield of the financial landscape, prepared to make their counterparts tremble. But doing so alone may not provide that added oomph with some positive craving. Alternative Investment Funds (AIFs) are one of the growing options available. If you’re looking to expand your alternatives outside of typical asset classes, these options are ideal for you.
What Are Alternative Investment Funds?
Put, Alternative Investment Funds, or ‘AIF, are a collective form of investment that gathers resources from a variety of foreign or domestic sophisticated investors. Unlike a larger pool of ‘traditional’ mutual funds which invest in the shares of several companies, for example, AIFs have a non-traditional approach of targeting a division of real estate, commodities, private equity and hedge funds. This is not investing without a plan, as these funds follow specific set guidelines targeting a portion of the market intending to make a profit.
Fundamental Attributes of Alternative Investment Funds
1. A lower level of liquidity than what is found in typical financial instruments
2. Higher risk and greater returns potential
3. Distinctive management fees and higher minimum subscriptions
4. Valuation is difficult because of non-standardized assets
5. Multiple asset classes which are expected to provide better diversification
6. Different risk-return characteristics from the normal portfolio investments
7. Unique legal regimes in different countries
Alternative Investment Fund Categories
According to the Securities and Exchange Board of India, there are 3 types of AIFs:
1. A category I AIF supports investment in nascent businesses, social enterprises, small and medium-sized enterprises, as well as investment in infrastructure.
2. Category II AIF comprises private equity and debt funds which are not in Category I or III.
3. Category III AIF employs a complex trading strategy including but not limited to leverage and hedging.
Pros of Investment in AIFs
1. Higher returns are achievable by investing in the best Alternative Investment Funds; however, such returns are only made by those who will take greater risks for a longer duration.
2. Some qualifiers have AIFs which can be expected to provide stability because they invest in assets that have low correlation to the market.
3. AIFs invest in multiple geographical locations across different asset classes and strategies, minimizing the level of risk attached to the investment portfolio.
Types of Alternative Investment Funds
Why Consider AIFs for Your Portfolio?
1. Outstanding features, unique markets and other investment areas that can be accessed
2. Improved diversification and risk management
3. Flexibility and customization available to meet investors’ needs
4. Increase transparency and reliability in contact with business because of regulation by SEBI.
Who Should Invest in AIFs?
AIFs are especially recommendable for high-net-worth individuals, and institutional investors that have the experience, finances and expertise to manage the risks and the costs incurred.
How to select the Best Alternative Investment Fund
When trying to figure out which AIF might work the best for you, keep these points in mind:
1. Your risk and goals
2. Track records of the fund and historical performance
3. Skillset and image of the fund manager
4. The strategy adopted by the fund and classes of assets made available for investment
5. Investment fees and capital requirements
6. Inclusion of the fund into your portfolio strategy
Conclusion
If used properly and thoughtfully, Alternative Investment Funds can provide a vehicle for a more diversified portfolio and perhaps even returns that are above average. But they also come with certain risks and intricacies. But as with any investment strategy, appropriate due diligence and seeking help from an AIF consultant or a broker before investing in the AIF is important. Focusing on one AIF investment strategy, carefully choosing the relevant AIF that meets investment goals and risk tolerance levels will hopefully add to the performance and robustness of the portfolio considering current turbulent economic times.
