The purpose of this research paper is to understand more about the
development and performance of alternative investment funds in India. These
funds were formally introduced in June 2012, and the author sought to understand
how Indians felt about this new investment vehicle with a range of possibilities
at the time.
Alternative investments are rapidly taking over many varied portfolios for tax
exempt entities including hospitals, universities, public foundations, and
healthcare facilities. With higher state reporting requirements, administrative
costs, and potential for unrelated company revenue and fines (both civil and
criminal), these investments also come with additional levels of risk.
Any investment instrument that is not a stock, bond, or cash is considered an
alternative investment. Because of their complexity, lack of rules, and relative
lack of liquidity, most alternative investment assets are owned by accredited,
high-net-worth individuals or institutional investors. The results of this study
are based on a variety of regression analyses that looked at how several factors
that depend on one another sequentially interacted.
Since its introduction in 2012, alternative investment funds (AIF) in India have
experienced exponential development. Every day that goes by, there are more
investors entering this market. This article will present some information about
the expansion of alternative investment funds from an Indian viewpoint.
In India, alternative investment funds (AIFs) are defined in Regulation
2(1)(b) of Securities and Exchange Board of India (Alternative Investment
Funds) Regulations, 2012. It refers to any privately pooled investment fund,
(whether from Indian or foreign or Non-Resident Indian Investors), established
or incorporated in the form of a trust or a company or a body corporate or a
Limited Liability Partnership (LLP).
Which are neither presently covered by any regulation of SEBI governing fund
management (like, Regulations governing Mutual Fund regulations,1996 or
Collective Investment Scheme regulations, 1999 ) and any other regulations of
the SEBI to regulate fund management activities, nor coming under the direct
regulation of any other specific regulators in India like IRDA, PFRDA, RBI.
Hence, in India, AIFs are private funds that are otherwise not coming under the
jurisdiction of any other regulatory agency in India except SEBI.
Venture Capital Funds, hedge funds, private equity funds, equity related
instruments, SME funds, social venture funds, commodities funds, debt funds,
infrastructure funds, etc. are all included in the definition of AIFs. While it
excludes mutual funds, collective investment schemes, family trusts (established
under the Companies Act of 1956 for the benefit of relatives), employee stock
purchase and option plans, employee welfare trusts, and gratuity trusts, as well
as other specific purpose vehicles not created by fund managers, such as
securitization trusts governed by a specific regulatory frame work, and funds
managed by securitization company or reconstruction company that is registered
with the RBI under Section 3 of the Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 and it also
exclude any such funds which is directly regulated by any other regulator6 in
Alternate Investment Fund
Regulation 2(b) defines the terms 'Alternative Investment Funds' as 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 SEBI (Mutual Funds) Regulations, 1996, SEBI
(Collective Investment Schemes) Regulations, 1999 or any other
regulations of the Board to regulate fund management activities.
Alternative investment funds refer to funds that include hedge funds, venture
capital, private equity, angel funds, real estate, commodities, collectibles,
structured products, etc. An alternative to traditional investing alternatives
are alternative investment funds (stocks, bonds, and cash). For advantages and
investment diversification, investors can purchase AIF funds. AIF funds are
typically preferred by high net worth investors, retail investors, and
individuals. However, unlike traditional assets, they are difficult to buy and
sell. The government is attempting to increase the transparency of these
alternative investment vehicles.
An Overview Of The Growth Of Alternative Investment Funds In Recent Years
According to the Global Limited Partner Survey conducted in 2017, our nation
emerged in first place and was deemed the best platform for alternative
investment. As a result, fresh capital has begun to rise and consumer protection
is now more comprehensive.
Alternative investment funds are generating a lot of buzz in our country, where
the stock market has seen a significant drop in investment following the decline
of benchmark Sensex. Additionally, AIF offers the incorporation of hedging
strategies, unlike mutual funds.
These factors suggest that alternative investment funds will improve their
position over the coming years. According to SEBI, the number of registered
funds for AIF has steadily increased every year, reaching 366 in 2018. About
470+ AIF have received funding as of September 2018, which has improved the
effectiveness of this volatile secondary market. This indicates a rapid and
significant growth in the Indian economy.
Economic Benefits Of Alternative Investment Funds:
General Economic Benefits: The positive effects of the emerging alternative fund
on the economy are well documented and include better corporate governance
through activists managers , greater liquidity in the markets, higher
performance returns and free flow of capital for both small and large
corporations. The industry has spurred job creation, financial growth as well as
innovation in financial products.
Economic benefits to Institutional Investors: Alternative investments funds
provide economic benefits to institutional investors such as pension funds. The
economic benefits derive from a combination of good returns, lower correlation
to traditional asset classes such as bonds and equities, and low volatility.
Consequently, institutional investors have been steadily increasing their
allocations to alternatives.
No significant risk to financial markets: It is believed that the alternative
investment funds market is based on lack of transparency to investors, to
regulators as well as tax evasion. However, if the situation of crises is
analysed then it can be seen that the alternative investments funds were not the
reason for global crises.
Top Alternative Investment Funds In India
- Hedge funds:
Hedge funds are a class of alternative investment funds that raise money
from investors to invest in local and international debt as well as
extremely hazardous equities markets. Hedge funds provide significant
returns to investors because they employ an aggressive investing approach.
Hedge fund managers demand a hefty management fee of between 2% and 20% of
the total yearly returns. Hedge funds are often preferred by authorised
investors with high net worth.
- Private Equity:
Private equity firms make investments in businesses that are not publicly
traded. Private businesses are unable to raise public financing since they
are not listed on public markets. So, they use private equity funds to raise
money. The investing horizon is rather broad. In India, private equity
funds have raised about $100 billion over the last 13 years. As a result,
they are crucial to the growth of small and medium businesses.
Oil, grain, agricultural products, energy, metals, and other commodities are
examples of commodities. These are attainable through trade. Investing in
commodities is a wonderful strategy to hedge against inflation because when
inflation rises, the price of commodities rises along with the price of
other things. However, the macroeconomic forces that influence the
commodities markets make them vulnerable to market volatility. Investors
should thus think about these considerations before making a commodity
- Real estate:
Prior to the introduction of REITs (real estate investment trusts),
investors could only participate in real estate if they had a sizeable sum
of money, often between a few lakhs and a few crores. Now, however,
investors may invest in real estate with as little as 5000 to 10,000 rupees.
With the use of platforms like Strata, Prop Share, and others, investors may
purchase real estate, such as offices and commercial buildings, for a little
investment. Investors can own a portion of grade A properties like offices,
warehouses, and commercial buildings. These properties already have a tenant
who pays rent each month, ensuring a steady flow of money for the property
- Venture capital:
Venture capital funds are the kinds of funds that invest in young, fledgling
businesses that require money to grow and improve their operations. After
the US and China, India has one of the largest startup ecosystems worldwide.
As a result, startup business owners can obtain funding from venture capital
funds. Based on the qualities, stage of product development, and asset size
of the organisation, venture capital funds invest in small enterprises and
startup companies. The primary goal of venture capital is to aid in the
expansion of goods and services while also assisting in business scaling.
Depending on the companies that a venture capital fund has invested in,
investors may get rewards.
- Peer-to-peer lending:
Traditionally, P2P lending included people depositing money in a bank to
earn interest and then lending that same money to borrowers who agreed to
pay the bank a certain amount of interest. The bank holds the difference
between the interest that the borrower pays and the interest that the
depositors earn. In contrast to banks, which have restrictions on who may
borrow money, how much they can borrow, and at what interest, modern P2P
lending does not use banks, allowing both lenders and borrowers to earn
higher interest rates. P2P lending is permitted on several P2P lending
platforms, including Faircent, Lendbox, Liquid Loans, and others.
These platforms allow lenders to select their borrowers based on loan
criteria, location, profile, reason for the loan, loan tenure, and rate of
interest. Currently, they offer 18-22% net returns. However, P2P lending is
associated with risk as there is always a chance of the borrower defaulting.
So, investors should do their research before investing in it.
- Angel funds:
Angel funds are a form of alternative investment fund that aggregate the
money of many investors who are eager to put money into start-up companies
in their early stages. Investors receive dividends after the new enterprises
turn a profit. Angel investors support the expansion and profitability of
Outlook On Alternate Investments Funds And Its Various Categories
AIFs are primarily divided into three groups depending on their effects on the
economy and the regulatory framework intended for them while also taking into
account the exposure, risk, and other effects on the economy.
The Alternative Investment Funds (AIF), in contrast to conventional investment
strategies, are exempt from the regulations set forth by SEBI for financial
institutions. When contrasted to stocks, bonds, etc., they have different
identities. Additionally, they are often seen as private investment
The classes into which these monies are divided are as follows:
- Category I
Such funds typically invest in start-ups, early stage ventures, social
ventures, SMEs, infrastructure, or other sectors or areas that the
government or regulators consider to be socially or economically desirable.
AIFs are those AIFs with positive spillover effects on the economy, for
which SEBI or the Government of India may consider certain incentives or
They are prohibited from using leverage other than to satisfy short-term
finance needs for no longer than 30 days, no more than four times annually,
and no more than 10% of the corpus, for example. Infrastructure Funds,
Social Venture Funds, SME Funds, and Venture Capital Funds.
The SEBI authorised a framework for the registration and regulation of angel
pools under a sub-category named "Angel Funds" under Category I-Venture
Capital Funds in June 2013 to give effect to the Union Finance Minister's
pronouncement about angel investor pools in the Union Budget 2013-14. Funds
of Category I Alternative Investment Funds may invest in units of the same
subcategory of Category I Alternative Investment Funds as long as they do
not invest in units of any other Fund of Funds.
- Category II
AIF are those AIFs for which no specific incentives or concessions are given
and not fall in Category I and Category III. They are prohibited from using
leverage other than to cover short-term funding requirements for a maximum
of thirty days, a maximum of four times per year, and a maximum of ten
percent of the corpus, as described for Category I AIFs.
Private equity or debt funds, for instance, would be included if the
government or any other regulator did not specifically offer them any
incentives or concessions. If a Fund of Category II Alternative Investment
Funds does not invest in units of other Fund of Funds, they may invest in
units of Category I or Category II Alternative Investment Funds.
- Category III
AIFs are open-ended or closed-ended funds that are thought to have some
potential negative externalities in certain circumstances and that heavily
rely on leverage. These funds trade with the goal of generating short-term
returns and don't receive any special incentives or concessions from the
government or any other regulator. For instance, hedge funds (which employ a
variety of trading strategies, invest in and trade securities of listed or
unlisted investee companies, and have a variety of risks or complex
products, such as listed and unlisted derivatives) use a variety of trading
Category III Alternative Investment Funds may use leverage or borrow with
the consent of the fund's investors and up to a maximum limit that may be
established by the SEBI, provided that the funds disclose the amount of
leverage used overall, the amount of leverage resulting from borrowing cash,
the amount of leverage resulting from positions held in derivatives or other
complex products, and the primary source of leverage in their investments.
These funds may also invest in Category I and III AIFs as long as they do so
only in those units and not in any other Fund of Funds' units. The regulation of
Category III Alternative Investment Funds would involve the issue of directives
addressing matters including operational standards, business conduct
regulations, prudential requirements, redemption limits, and conflicts of
interest, as determined by the SEBI.
Investment limitations and AIF requirements Any material change to the fund
strategy must be supported by two-thirds of unit holders, measured by the value
of their investment in the alternative investment fund (AIF), and must be
disclosed in the placement memorandum to investors. Alternative investment funds
may raise money from any investor, whether they are Indian, foreign, or
non-resident Indians, by issuing units.
- AIFs must accept investments of at least Rs. 1 crore from investors in
order to raise money through private placement. (Provided that the minimum
amount of investment must only be 25 lakh rupees in the event of investors
who are employees or directors of the Alternative Investment Fund or
employees or directors of the Manager.)
- A maximum of 1000 investors may participate in any one fund plan, and
each scheme must have a minimum capital of Rs. 20 crore. An ongoing stake in
the AIF of at least 2.5% of the corpus, or Rs. 5 crore, whichever is lower,
must belong to the manager or sponsor of the AIF. (This continuing interest
shouldn't involve the waiver of management fees; rather, it should take the
form of an investment in the Alternative Investment Fund.), Provided that in
case of Category III Alternative Investment Fund, the continuing interest
should not be less than 5% of the corpus or 10 Crore rupees, whichever is
lower and the Manager or Sponsor shall disclose their investment in the
Alternative Investment Fund to the investors of the Alternative Investment
Fund in all Categories.
- The AIFs in categories I and II are closed-ended, and the schemes they
launch must have a minimum tenure of three years. They may also extend the
tenure of the closed-ended AIFs. AIFs of Category I and II are not permitted
to invest more than 25% of the investible funds in one Investee Company
while it is 10% for Category III AIFs, and category III AIFs can be open
ended or closed ended. Alternative Investment Funds may be permitted up to
two years subject to approval of two-thirds of the unit holders by value of
their investment in the Alternative Investment Fund. In the absence of
consent of unit holders, the Alternative Investment Fund shall fully
liquidate within one year following expiration of the fund tenure or
- AIFs may invest in associates (in which the Manager or Sponsor holds,
either individually or collectively, more than 15% of its paid-up equity
share capital or partnership interest) with the consent of 75% of investors
measured by the value of their investment in the Alternative Investment
- The corpus' uninvested portion may be placed in liquid mutual funds,
bank deposits, or other liquid assets of higher calibre like Treasury bills,
CBLOs, Commercial Papers, Certificates of Deposits, etc. until the money is
allocated in accordance with the investment goal.
- Units of close ended AIFs are allowed to be listed on a stock exchange
(but only after final close of the fund or scheme) subject to a minimum
tradable lot of 1 Crore rupees.
- The reporting requirements to SEBI must be followed by all AIFs either
on a monthly basis (for Category III AIFs that do not use leverage) or a
quarterly basis (for Category I, II, and III AIFs that do). The circular
dated July 29, 2013 specifies the reporting formats and the method of
- As stated in the circular, Category III AIFs must also adhere to
standards for risk management, compliance, redemption, and leverage. The
maximum leverage for a Category III AIF is 2 times, meaning that the gross
exposure after hedging and portfolio rebalancing activities is neutralised
should not be greater than 2 times the fund's NAV.Norms in case of
application for change in category of the AIF were specified by SEBI vide
circular dated August 7, 2013.
- Co-investment in an investee company by a Manager/Sponsor should not be
on terms more favorable than those offered to the particular AIFs by such
Data Analysis And Findings
The analysis and conclusions are based on reports compiled from data that
registered alternative investment funds submit to SEBI on a quarterly or monthly
basis. All such reports are accessible on SEBI's official website.
- The data shows the growth rate of 102.8% each quarter in commitments
raised and its growing very fast.
- The amount of funds committed under Category I's "Infrastructure Fund"
subcategory is relatively significant, yet only 11.22% of those funds have
really been raised, and only 30.50% of those monies have been invested
effectively. Just 3.42% of promises under this sub category have been
invested in thus far.
- "Social venture fund," the second subcategory under category I, had a
rapid rise in funding commitments in the second quarter of the current
fiscal year. By the conclusion of the third quarter of the current fiscal
year, 18% of such funds had been raised and 32.34% had been invested. Just
5.82% of the promises under this sub category have been invested in thus
- In comparison to other subcategories and categories of funds, the third
subcategory of funds under category I, "Venture capital fund," has shown a
continuous and most consistent growth in commitments. Only 6.15% of the
commitments made under this fund have been successfully invested, despite
the fact that 44.45% of the commitments have already been raised and 13.84%
of the funds successfully raised.
- No commitments raised on account of sub category 'SME fund' under
category I till date.
- In the second and third quarters of the current fiscal year, obligations
raised in category II suddenly increased. In comparison to category I,
74.19% of these pledges' money were effectively invested, and 34.18% of them
have already been raised. Although only 25.36% of the funds committed have
been invested, this indicates that there are still plenty of opportunities
for investment in private equity and debt funds and that investors still
have faith in these funds when thinking about long-term investment
- The third quarter of the current fiscal year and the fourth quarter of
the previous fiscal year saw a dramatic surge in commitments raised in
category III. The rate of money raised in this area is the greatest of all
categories at 66.95% of commitments raised, while the rate of investments
made with those funds is the highest of all categories at 85.36%. This
demonstrates that, in contrast to the other two groups, investors choose
short-term open-ended hedge funds for their speedy profits.
- Till the end of the third quarter of the current fiscal year, pledges of
Rs. 11186.36 crores have been raised under all of these categories. Out of
the total of Rs. 2907.03 crores raised up to this point, Rs. 1904.09 crores
have been successfully invested; however, Category I has only received Rs.
203.77 crores, or 10.70% of the total investment made, while Category II has
received Rs. 1222.67 crores and Category III has received Rs. 477.65 crores.
Although roughly half of the pledges received were for category I, this
category received the majority of commitments.
So the investments opportunities are still higher in category II and Category
III and investors prefer these categories, whereas the SEBI and government
consider Category I as economically and socially desirable and may offer
concessions and incentives for this, but still no great impact of such
considerations visible as of now, it might happen due less opportunities
available in the market or lack of confidence among investors.
Reasons Pertaining To The Sustainable Growth Of Alternative Investment In India
There are wide arrays of factors that affect the growth of AIFs in our
country, some of them are mentioned below:
The AIFs in our nation have increased dramatically as a result of the expanding
real estate market. Additionally, this industry was ranked as India's
second-most active in 2017. One of the key causes of the growth of AIFs is the
creation of the NIIF (National Infrastructure Investment Fund) by the Indian
government, which has a budget of Rs 20,000 crores.
Investors are more likely to invest in Category III since they are permitted to
do so up to 10% of the investable money. Additionally, they are allowed to take
advantage up to two times.
The Reserve Bank of India has also released a notification for AIFs foreign
investment via the automatic route since November 2015.
These two items are: First, FDI restrictions will apply to AFIs if the person in
charge of the fund is an Indian Territory resident. Second, it would be
considered local funds if the majority of the AIF is made up of foreign capital.
For the Category I and II funds, a tax pass-through structure is being used. In
this manner, investors can easily avoid the issue of double taxation and will be
responsible for handling tax liabilities under these categories.
However, there is still room for improvement to ensure long term growth
Viable Strategies to Ensure Substantial in Alternative Investment Funds in
AIF growth is another important economic success measure for India. In order to
legitimately modify the structure of India's AIFs, it is imperative to close the
gaps by choosing the appropriate reforms.
Finding local institutional investors to support AIF investments
Our nation is currently increasingly financially reliant on the international
market. Positive results in the expansion of AIFs in India would result from a
rise in local institutional investors.
Essential Amendments to the Goods and Service Tax Framework
The current GST framework must be incorporated with 2 changes, which are as
Growth-Oriented Taxation Reforms
- For all investors who put up their funds in PE and VC funds, 5% of tax
ought to be levied on services provided to these funds.
- GST should be applied on overseas investments that surpassed 50% in AIFs
as all the services that the Alternative Investment funds receive must be
deemed as an export of services.
Existing tax reforms for AIF sectors isn't favourable as it should be. Below we
have mentioned some essential measures to cater to such an issue.
Compulsory Disclosure of Fund-based Information
- For Category III AIFs, there should be a Pass-through structure.
- The transaction-related unlisted securities and profits should not be
perceived as business gains. Rather it must be treated as capital gains.
Besides, the expenses related to AIF management should be treated as
- If the AIF ends up unprofitable, it must be set-off against the income
of the investor rather than the business profits of AIFs.
- Deployment of a Unit-based Taxation Approach must be done prior to the
advent of AIFs under the stock exchange platform, such as mutual funds. The
tax shall not be imposed on the investors of registered AIFs:
- Distribution tax should be applied on dividends as well as interest.
- Capital gains tax should be brought into existence along with unit transfer for
short and long-term capital gain.
- Tax exemption should be accessible to an overseas investor for the generated
income via an AIF in as IFSC.
Important information on the performance of the fund must be disclosed to the
investor. Additionally, it is necessary to create an Investment Advisory
Committee that will be crucial in better controlling all conflicts relating to
The aforementioned crucial measures would undoubtedly support the long-term,
sustainable expansion of AIFs in India. Even if alternative investment funds are
still in their infancy, with such reforms in place, they will undoubtedly
achieve success in the years to come.
The growth in AIFs will surely have a sustainable future in the coming years.
You will witness the increase in the investor's numbers, which in turn leads to
stimulate the growth of the Indian Economy. A great transformation is on its way
that will ensure cut development in the AIF sector soon.
The SEBI has done a good job of providing very specific regulations, guidelines,
and criteria's for different types of funds in accordance with the risk-return
prospective involved in the same and economically and socially desirable
prospects. Additionally, it has developed various compliances to protect
investors, but there needs to be more specific elaboration in respect of various
points needed to be framed as investor will feel appropriately informed and less
hesitate towards investing in such.
Regardless of the category or subset to which they belong, there is nothing new
for alternative investment funds in terms of tax advantages, with the exception
of trust forms, which are still clearly specified for venture capital funds
In order to increase the number of people who can invest and ensure that those
with good ideas and opportunities do not experience a financial crisis or find
it difficult to manage their finances, it is necessary to improve alternative
investment opportunities and reduce the formalities associated with investing in
The impact of alternative investment options on the global economy as a whole
contributes to an increase in investment, productivity, and employment globally.
Alternative investments give investors more access to a variety of schemes with
flexibility and a number of options to invest based on their risk and return
expectations. This encourages more people to participate in investment
opportunities, which strengthens the financial system by allowing money to flow
smoothly from the surplus sector to the deficit sector as needed, satisfying the
needs of each.
The government is also playing a significant part in this by promoting these
alternative investment options by offering a variety of incentives and
exemptions where necessary, provided the investment is for goals that are both
economically and socially beneficial.
- SEBI (Alternative Investment Funds) Regulations, 2012 § 2(1)(b).
- Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 § 3.
- SEBI (Alternative Investment Funds) Regulations, 2012 § 2(b).
- SEBI (Mutual Funds) Regulations, 1996.
- SEBI (Collective Investment Schemes) Regulations, 1999.
- Alternative Investment Funds in India - A Comparison with the West,
ARANCA (Nov. 25, 2022), https://www.aranca.com/knowledge-library/articles/business-research/alternative-investment-funds-in-india-a-comparison-with-the-west.
- Directive on Alternative Investment Fund Managers, 2 European Union
Committee's 3rd Report (2009-2010).
- What are Alternative Investment Funds? Should You Invest In Them?,
INDMONEY (Nov. 25, 2022), https://www.indmoney.com/articles/personal-finance/what-are-alternative-investment-funds.
- SEBI (Alternative Investment Funds) Regulations, 2012 § 2(1)(l).
- SEBI (Alternative Investment Funds) Regulations, 2012 § 2(1)(r).
- SEBI (Alternative Investment Funds) Regulations, 2012 § 2(1)(z).
- The Business Finance Market: A Survey, Industrial Systems Research
Publications, Manchester UK, 3rd. revised edition 2008.
- Alternative Investment Funds, Tax Management India (Nov. 26, 2022),
- James Chen, Venture Capital Funds: Definition for investors and how it
works, Investopedia (Nov. 24, 2022), http://www.investopedia.com/terms/v/vcfund.asp.
- Rosemary K. Abraham, Alternative investment funds (AIFS), ARTHAPEDIA
(Nov. 23, 2022), http://www.arthapedia.in/index.php?title=Alternative_Investment_Funds_%28AIFs%29.
- Nusrat Hassan, India- Alternative investment fund, MONDAQ (Nov 25,