Introduction to AIF


Introduction to AIF

“Alternative Investment Fund” means any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which,

  • is a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors; and
  • is not covered under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities.

Exemptions: Family trusts/ ESOP trusts/ Employee welfare trusts/ Holding companies/ Securitization trusts

Why AIFs?

  • Greater flexibility and scope in relation to traditional asset class.
  • Greater returns (comes with higher risk).
  • Greater diversification, hence, low correlation.
  • Mode to make investments in quality unlisted companies and high-yielding real estate through VC and PE route.
  • Since the equity market is richly valued, HNIs are finding structured products in AIF space more attractive with capital protection along with appreciation.
  • Helps meet investors across planning spectrum, diversifying portfolio and reducing volatility.

Categories of AIFs

AIFs are divided into 3 different investment structures and requirements:
  • Category I AIFs – AIFs which invest in start-up or early-stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable.
    Examples of this category are as follows:
    – Infrastructure Funds
    – Angel Funds
    – Venture Capital Funds
    – Social Venture Funds
  • Category II AIFs- Funds which cannot be categorized as Category I AIFs or Category III AIFs falls under this Category. These funds do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the AIF Regulations. AIFs such as private equity funds or debt funds for which no specific incentives or concessions are given by the Government of India or any other regulator are included in the Category II AIF classification.
  • Category III AIFs- AIFs which employ complex or diverse trading strategies and may employ leverage including through investment in listed or unlisted derivatives. AIFs such as hedge funds or funds which trade with a view to make short-term returns or such other funds which are open ended and for which no specific incentives or concessions are given by the Government of India or any other regulator are included in the Category III classification.

Tax Implications on AlFs:

  • For Category I & Category II, there is a pass-through status. Tax pass-through status means that the income or loss (other than business income) generated by the fund will be taxed at the hand of the investor and not by the fund business. So, if you earn by investing in them, taxes will be implemented based on your current tax slab.
  • Category III funds is taxable at the fund level. This has no pass-through status. The highest rate of tax (as per the current tax slab) is charged on the profit made by this fund. Therefore, funds get taxed at the maximum marginal rate of 42.7%. In case you invest in them, you receive your earnings after this deduction.

India has seen significant growth
in Cat-III AIF commitments

  • Better Diversification Possibilities

    Invest in much wider asset classes including unlisted equity, debt, derivatives - providing better risk management possibilities

  • Leverage

    Can be leveraged up to 2X for better risk adjusted returns

  • Professional Management

    Active investment decisions based on thorough business understanding

  • Taxability

    Tax is assessed and paid at AIF Scheme level

  • Better Governance

    Comprehensive SEBI regulations, offering transparency and better investor protection