The total assets of Alternative Investment Funds (AIFs) are nearing ₹7-lakh crore as a growing number of wealthy individuals are diversifying their investments into sophisticated instruments for higher risk-adjusted returns amid increasing volatility in the equity markets.

According to latest data, the total AIF assets as of June 2022 stood at ₹6.95-lakh crore, growing by 43 per cent year-on-year from ₹4.87-lakh crore in the same quarter of the previous year. The assets of alternative investments crossed the milestone of ₹5-lakh crore in September 2021. 

“The rapid growth of AIFs was boosted by an increase in demand for private equity and debt across investor classes, primarily looking for diversification through new asset classes. Additionally, the dip in perceived upside from public markets based on recent tech IPOs’ performance has driven more investors to exploit returns in the private (unlisted) markets,” said Manmohan Mall, Head, Kristal Private Markets.

Three categories

Structured similar to mutual funds, AIFs pool money from sophisticated private investors to invest them as per a defined investment policy. AIFs have a minimum investment limit of ₹1 crore. There are three categories of AIFs. Category I funds are venture capital funds (including angel funds), social impact funds, SME (small and medium enterprise) funds and infrastructure funds. Category II funds include real estate funds, private equity funds, distressed asset funds, structured credit and venture debt funds. Category III includes hedge funds which employ different trading strategies like long-short, arbitrage, fixed income and derivatives trading. 

Vishal Chandiramani, Chief Operating Officer, TrustPlutus Wealth India, said the option to diversify investments through a wide range of strategies under three categories of AIFs and the low correlation with equity markets are some of the key factors attracting investors towards alternative funds. 

Category II AIFs, which account for over 80 per cent of the total assets, grew 44 per cent to ₹5.62-lakh crore as of June from ₹3.91-lakh crore in the same quarter of the previous fiscal.

Chandiramani attributes the growth to traction towards private equity (PE) funds, structured credit and venture debt funds. “Given the strong listing among several new age companies last year, the demand for investing in PE funds got a boost. Also investing through a fund ensures that you own a diversified portfolio of early/mid stage companies, across sectors which helps to reduce concentration risk.”

On the debt side too, Chandiramani said, with post tax FD & debt mutual funds returns typically ranging 3-6 per cent (depending on tax bracket), investors started looking at high yield debt options and venture debt funds and structured credit funds benefitted from this trend.

While assets of Category I AIF grew 27 per cent yoy to ₹58,121 crore (₹45,666 crore) as of June 2022, Category III AIF grew 47 per cent during this period to ₹74,481 crore (₹50,643 crore). 

Pre-IPO funds

In the last 2-3 years, several high networth individuals (HNIs) rushed towards pre-IPO funds aiming stellar returns due to the ongoing IPO frenzy. But, that trend seems to have moderated. 

“Given that the valuation premium for several new age companies has come off in the last few months, we have seen some moderation in investor appetite for pre-IPO funds,” Chandiramani. said

He, however, added that pre-IPO funds can be considered by investors having a suitable risk appetite since it is better to hold unlisted companies through a diversified fund structure rather than investing in one or few stocks, which may result in high portfolio concentration risk.

Kristal’s Mall said while current macro headwinds have impacted late-stage funds, the interest for venture capital and growth stage funds continues to remain strong with the private credit market in India seeing a huge uptick over the past 6-9 months.