Context:
About 20% of investments in Alternative Investment Funds (AIF) has been used to circumvent financial- regulations.
Alternative Investment Funds (AIFs):
- Aspecial investment category distinct from conventional investment instruments.
- Refers to any fund established in India as a privately pooled investment vehicle, collecting funds from sophisticated investors (both Indian and foreign) for investment purposes.
- It pools funds from investors and invests them under different categories of investments as specified by the SEBI for the benefit of investors.
- Regulation: Governed by the SEBI (Alternative Investment Funds) Regulations, 2012.
- AIFs can be formed as a company, Limited Liability Partnership (LLP), trust, etc.
- Primarily institutions and high net worth individuals invest in AIF due to the high investment amount required.
Categories of AIFs:
- Category I AIFs:
- Investment Focus: Invest in start-ups, early-stage ventures, social ventures, SMEs, and sectors deemed socially or economically desirable by the government or regulators.
- Examples: Venture capital funds, angel funds, SME funds, social venture funds, infrastructure funds.
- Category II AIFs:
- Classification: Includes funds not classified under Category I or Category III.
- Leverage: Do not undertake leverage or borrowing except for day-to-day operational requirements as permitted by regulations.
- Examples: Real estate funds, debt funds, private equity funds, funds for distressed assets.
- Category III AIFs:
- Investment Strategies: Employ complex or diverse trading strategies and may use leverage, including through investment in listed or unlisted derivatives.
- Examples: Hedge funds, PIPE funds.
- Tenure: Can be open-ended or close-ended, unlike Category I and II AIFs which are required to be close-ended with a minimum tenure of 3 years.
Differences Between Alternative Investment Funds (AIFs) and Conventional Investments:
| Aspect | Alternative Investment Funds (AIFs) | Conventional Investments |
| Definition | Investment vehicles pooling funds from sophisticated investors for non-conventional assets | Traditional investment instruments widely recognized and used |
| Asset Classes | Real estate, private equity, hedge funds, commodities, art | Stocks, bonds, cash |
| Liquidity | Generally less liquid, meaning they can’t be quickly converted to cash. | Highly liquid |
| Risk | Higher risk and volatility | Generally lower risk |
| Regulation | Less regulatory oversight compared to conventional investments. | Heavily regulated by government bodies like the Securities and Exchange Commission (SEC). |
| Accessibility | Higher minimum investments, accessible mainly to accredited investors | Easily accessible to average investors |
| Management | Often require active and specialized management | Commonly involve passive management |
Source: The Hindu
Previous year question
Consider the following statements:
Statement-I: Interest income from the deposits in Infrastructure Investment Trusts (InvITs) distributed to their investors is exempted from tax, but the dividend is taxable.
Statement-II: InviTs are recognized as borrowers under the ‘Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’.
Which one of the following is correct in respect of the above statements? [2023 Prelims]
(a) Both Statement-I and Statement-II are correct, and Statement-II is the correct explanation for Statement-1
(b) Both Statement-I and Statement-II are correct, and Statement-II is not the correct explanation for Statement-1
(c) Statement-1 is correct but Statement-II is incorrect
(d) Statement-I is incorrect Statement-II is correct
Answer: (d)