Portfolio

Have a crore? You could try AIFs

Meera Siva Nalinakanthi V | Updated on January 13, 2018 Published on March 11, 2017

PO13_BS_Fish_bank

Have at least ₹1 crore to invest? Then, alternative investment funds (AIFs) may be an option to consider. These are SEBI-registered closed-ended private funds that are managed professionally. They have a fixed tenure of usually over five years in which investments are made in the initial few years.

The fund may invest in different asset classes such as real estate, unlisted companies, commodities, derivatives or distressed assets of corporates.

Real estate funds

For those who want to take real estate exposure without holding a physical asset, real estate AIFs may be an option to consider. Sample this. Price growth in physical property has been poor with pay-outs of tax and other fees such as stamp duty denting returns.

But professionally managed real estate private equity funds have given envious returns — north of 15 per cent annually. For instance, ASK group’s ₹66 crore fund exited with ₹121 crore, giving an internal rate of return of 25 per cent to investors.

These funds come typically in two flavours — debt or equity. Debt-based real estate PE funds provide loans to developers at interest rates of typically over 18 per cent. Equity based funds take a stake in a project and provide returns derived from the sale of the project. These funds could be focused on either the residential or commercial segment.

Hedge funds

Delivering absolute returns through various complex strategies using multiple asset classes is what hedge funds do globally. Funds may have specific geographic focus that may shift. Among the several hedge fund strategies, volatility, risk and investment returns vary widely. They frequently use instruments such as derivatives and techniques such as short selling to hedge against market risk.

For instance, Avendus Absolute Return Fund invests in Indian listed equities as well as equity derivatives to produce absolute returns with volatility that is lower than the overall stock market. The fund targets 15-20 per cent annual absolute returns, while keeping volatility at a third of that of the broad market.

The fund also takes high cash calls, should the market turn volatile. It takes macro sector calls and also actively manages short positions by identifying companies/themes that will lag the market.

Likewise, debt funds with a fixed tenure of over five years may be considered. These funds have specific mandates. For example, IFMR plans to launch two funds with exposure to microfinance, small business loan finance, affordable housing finance, commercial vehicle finance, agri-business finance, as well as in mid-sized corporations. Their six-year micro-finance focussed AIF had given returns of 15 per cent since inception (June 2015).

Risks

AIFs come with multiple risks and hence SEBI has set the individual investment limit rather high at ₹1 crore, to protect retail investors who may not fully comprehend the risks. For example, being closed ended, most AIFs do not have any liquidity, which means there is no way investors can exit in the interim.

Also, many funds may extend the tenure if they are unable to provide an exit. For example, many of the commercial real estate PE funds could not liquidate their assets and extended their tenure beyond the original period, locking up investor capital.

Also, as the tenure of the funds tends to be long, it is difficult to assess how well the strategy will work out during the period. Hence it is important to know the past exit track record of the team to assess their competence. As success depends on the investment team’s strength, ask about the team’s commitment and process to ensure continuity, when there is a change. Along with this, the risk management framework and the team’s ability to identify opportunities must also be assessed.

Published on March 11, 2017

A letter from the Editor


Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Sincerely,

Support Quality Journalism
This article is closed for comments.
Please Email the Editor
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.