The HNI and UHNI (together with NRI) investor has a ‘new’ pitch – the AIF or an Various Funding Fund.
Given the latest spurt of property in AIFs (7 lakh crores+ as of June 2022), a number of mutual fund homes have even began to launch their very own AIFs. Sadly, they’re simply lame copies of their MF portfolios to focus on the HNI investor’s fancy.
An AIF wants a minimal funding of Rs. 1 crore clearly making it a device for ego therapeutic massage by Non-public Wealth workplaces of Banks. The producers of the merchandise are very happy to oblige.
Effectively, let’s not get carried away and perceive what we’re entering into.
[Now, if you just want to know the questions to ask, skip to the end.]
What does the AIF have to supply?
The AIF construction was envisaged for particular funding methods specifically within the unlisted area or hedge funds. They get to entry a a lot wider alternative set than the listed firm area accessible to mutual funds and/or PMS.
There are 3 classes of AIFs, every with a definite position to play and a way to seize worth.
a) Class 1 AIF – Startup investments – seed / angel funds, infrastructure funds. At the least 2/3rds is invested in unlisted fairness shares or fairness linked investments. In case of SME funds or social enterprise funds, 75% or extra is invested in unlisted securities.
b) Class 2 AIF – AIFs which aren’t Class 1 or 3 funds and don’t undertake borrowing or leverage apart from each day operational necessities are handled as Class 2 AIFs. These embody debt funds, personal fairness funds, distressed asset funds, actual property funds. Once more, bigger portion of investments needs to be in unlisted area.
c) Class 3 AIF – Hedge funds, lengthy brief methods – energetic use of derivatives in addition to advanced, structured merchandise with leverage; This class has no explicit restrictions and might freely put money into listed corporations as effectively.
As you possibly can discover, Class 1 & 2 AIFs can have a variety of illiquidity. Additionally, Class 2 & 3 AIFs are pitched probably the most by banks to traders.
An AIF is usually a good route so as to add extra diversification to your portfolio, offered you ask all the suitable questions.
Know that, very like mutual funds, an AIF can be a pooled funding, the place you might be allotted items in opposition to your funding wit.
In distinction, with a PMS, you maintain the funding straight in your title. The PMS entity is generally a supervisor of your funds in your demat account.
Then there’s the matter of prices and taxes.
Watch out for prices
AIF prices encompass fastened payment and/or variable, that’s, revenue share / carry.
The fastened charges embody, placement payment / setup payment, operations payment, taxes, and so forth.
My view is that such methods ought to have solely revenue share and no fastened charges.
By way of taxes, the revenue of the AIF is handed via to the investor and the investor is liable to pay the related taxes on the identical.
Let’s take a fast take a look at among the present and new AIFs
True Beacon is a Class 3 AIF run by Nikhil Kamath (additionally founding father of Zerodha) and makes use of lengthy/brief methods primarily based on its evaluation of market. Invests in massive cap shares and makes use of derivatives for hedging. Charges is 10% revenue share.
ABSL India Fairness Providers Fund is a service centered multicap AIF .
It’s not clear if the AIF will use any of the approaches that an AIF can or simply depend on investing in common listed companies.
If that’s the case, then it seems to be no completely different than a thematic companies oriented mutual fund reminiscent of Sundaram Providers Fund or Mirae Nice Client Fund with an present observe report.
Layers of charges, fastened + revenue share.
TrueNorth Fund VII is a Class 2 AIF with a concentrated portfolio technique, closed ended (5 years), with a minimal dedication of Rs. 2 crores and a hard and fast + variable charges with a hurdle fee.
Yet one more one is the most recent HDFC Choose AIF FOF – 1, which goals to put money into 10 or extra different AIFs within the Non-public Fairness, VC area.
The tenure for this fund is 11 + 2 years – large to place off many traders however for a fund like this.
The one declare this AIF could make is that it selects different managers who then put money into startups to pre-IPO corporations via their respective VC/PE funds.
To make that potential, it has a number of layer of prices – setup, administration payment, working payment, revenue share over and above what different fund mangers will cost. Good luck!
The inquiries to ask the AIF
Now, you suppose you’ve got discovered an AIF that you just appear to have favored. Earlier than you make investments although, listed here are a couple of questions / data you possibly can ask to judge.
- What’s the AIF attempting to do? How is the technique distinctive, differentiated and distinct from something already on the market?
- Some AIFs can concentrate on focus of the portfolio as effectively, say for holding simply 10 to fifteen shares, which might not be potential in an MF construction. However that ought to come out explicitly within the providing.
- What’s the minimal funding quantity? Is there a dedication interval or a lock in? What occurs if it is advisable exit halfway, for any motive?
- How will the fund make investments – straight in corporations or by way of one other fund (FOF)?
- Who’re the folks working the present? Background and observe report? Are you able to meet the fund supervisor?
- How will it talk with traders? Frequency and the kind of studies.
- Given the distinctive nature of the technique (hopefully), at what level will they are saying that the technique isn’t working and return the cash to the traders?
- What are the prices of funding administration?
- Is the payment charged on your complete dedication proper from the start or solely on the capital drawn?
- In case of fastened + revenue share, is the fastened price adjusted for the revenue share calculation?
- Is the hurdle fee with catch up, that’s, if the fund failed to satisfy the hurdle in a single 12 months, will the hurdle fee go up subsequent 12 months?
- Does the fund comply with a excessive water mark precept, that means, will it cost charges after if it crosses the earlier worth at which charges was charged.
- Every other costs not explicitly acknowledged within the supply doc?
- What would be the taxation? Who pays the taxes?
- Is the efficiency assured? If not, what’s an inexpensive expectation vary to have, internet of prices and costs? Cautious there.
- Are you able to get a couple of references of different shopper/traders (together with purchasers who’ve withdrawn the funding)?
I assume that submit this interrogation, you can find it straightforward to say NO to most pitches coming your manner.
That’s the concept.
You want a big dose of persistence for AIF methods to work out.
If you happen to consider rigorously, you would possibly suppose that you’re higher off with a less complicated, extra tax environment friendly and decrease price construction reminiscent of Mutual Funds.
What about smallcases? Effectively, learn this.