13 Mar 2017 14:49 IST

Have a crore? You could try AIFs

These are SEBI-registered closed-ended private funds that are managed professionally

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.

(The article first appeared in The Hindu BusinessLine.)

Videos

Growth vs Value Investing

'Children are having a bigger say in family purchases'

'Recruiters want students with good domain knowledge'

Recommended for you