Alternate Investment Fund

What is AIF
Source: Tavaga Research

What are Alternative Investment Funds?

According to Securities Exchange Board of India (Sebi), an Alternate Investment Fund or AIF is a privately pooled fund established or incorporated in India. It collects money from high networth investors (may include Indians, foreigners) to invest in a pre-defined fashion.

Alternatives are investments in assets other than stocks/bonds and uses strategies different from the traditional ones.

Example

A hedge fund, a venture capital (VC) funds, REIT is also an AIF.

What are the various categories of AIFs?

AIFs has been categorised under three types by Sebi:-

AIF Category I

Includes AIFs which invest in start-up or early-stage ventures, small and medium enterprises (SMEs), infrastructure, or any other sectors the government or regulator considers as socially or economically desirable.

VC funds, SME funds, social venture funds and infrastructure funds are some Category I AIFs.

AIF Category II

Includes AIFs which do not undertake leverage or borrow other than to meet the day-to-day operational requirements or the expenses as permitted by Sebi under its AIF Regulations, 2012.

Funds for distressed assets, private equity (PE) funds and real estate funds are some Category II AIFs.

AIF Category III

Includes AIFs which employ diverse or complex trading strategies and those that may employ leverage, through investment in listed or unlisted derivatives, for example.

Hedge funds are a Category III AIF.

AIFs are regulated by SEBI

Are AIFs good or bad?

When an investor wants to diversify his/her portfolio, AIFs are the best way to do this. Even mutual funds are AIFs. 

Whether AIFs are tax-efficient or not?

5% of Investor’s income will be charged as tax under the head capital gains and interest income

The finance bill presented on July 30, 2019, provides for revisions to angel tax provisions so as to avoid tax abuse as well as encourage investments from Category 2 AIFs in venture capital undertakings. It also contains provisions for Offshore investments by non-residents in AIFs will be taxed in the country of origin so as to avoid double taxation.