Definition: Alternative Investment Funds are the investments which do not happen via the traditional modes of investment such as stocks, bonds, cash, property etc. The other avenues have been put into the Alternative Investments, though there is no proper definition of AI.
Some of the alternative investments include the commodities, private equity, hedge funds, venture capital, and financial derivatives as well as assets such as paintings, other arts, wines, antiques coins and stamps. The gains in these assets would be called capital gains and provisions accordingly would apply to them. Most of the alternative investment funds raise capital from High Net-Worth Investors (HNIs) with a view to investing in accordance with a defined investment policy for the benefit of those investors.
Types of Alternative Investment Funds
These funds are established in India in various formats like trust, company, limited liability partnership etc. SEBI has allowed AFIs to be operated under only three categories. These are:
Category I: These will get incentive from the ruling government. This includes Social venture funds, Infrastructure funds, Venture Capital funds, SME funds etc.
Category II: are those AIFs for which no specific incentives or concessions are given. They do not undertake leverage or borrowing other than to meet the permitted day to day operational requirements, as is specified for Category I AIFs. Private Equity funds, Debt funds etc. are included in this category.
Category III: They operate to make short-term gains and come without any concessions. Hedge Funds are included here.
Investment into the Alternative Investment Funds is open to both Indian and foreign investors. It has been announced in Budget 2016 that the foreign investments will be allowed in alternative investment funds (AIFs). While presenting the budget, the Finance Minister also announced that for the purpose of AIFs, the government will do away with the categorization of foreign portfolio investors (FPI) and foreign direct investments (FDI). This can further boost the AIF industry in India, which is still in nascent stage.
Private Equity Fund: Private equity is capital that is not noted on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity, and the capital can be utilized to fund new technology, make acquisitions, expand working capital, and to bolster and solidify a balance sheet.
SME Fund: SME or Small and Medium Enterprise Fund are those AFIs where investments are done in unlisted (or to be listed on SME Exchange) securities of investee SME companies.
Social Venture Funds: A social venture is any trust, company, limited liability partnership done to for general social welfare or solving some social problems, providing social benefits etc. These can include charitable institutions, societies, trusts, companies (registered under Section 25 of Companies Act, 1956); micro finance institutions etc. Any AFIs which invest in securities of the social ventures satisfying the performance norms as laid down by the funds as called Social Venture funds.
Venture Capital Funds: These are those AFIs which invest in securities of start-ups usually involved in making new products, services, technology, IPR etc. These companies are not listed and do not include-NBFCs, Financing etc.