The HNI and UHNI (together with NRI) investor has a ‘new’ pitch – the AIF or an Different Funding Fund.
Given the latest spurt of belongings 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 software for ego therapeutic massage by Personal Wealth workplaces of Banks. The producers of the merchandise are more than pleased 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 obtainable 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 very 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 day after day operational necessities are handled as Class 2 AIFs. These embrace 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 quick methods – lively use of derivatives in addition to advanced, structured merchandise with leverage; This class has no specific restrictions and might freely put money into listed firms as properly.
As you possibly can discover, Class 1 & 2 AIFs can have lots of illiquidity. Additionally, Class 2 & 3 AIFs are pitched essentially the most by banks to buyers.
An AIF is usually a good route so as to add extra diversification to your portfolio, offered you ask all the fitting questions.
Know that, very similar to mutual funds, an AIF can also be a pooled funding, the place you might be allotted models in opposition to your funding wit.
In distinction, with a PMS, you maintain the funding instantly in your title. The PMS entity is generally a supervisor of your funds in your demat account.
Then there may be the matter of prices and taxes.
Watch out for prices
AIF prices encompass mounted payment and/or variable, that’s, revenue share / carry.
The mounted charges embrace, placement payment / setup payment, operations payment, taxes, and so forth.
My view is that such methods ought to have solely revenue share and no mounted 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 have 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/quick methods based mostly on its evaluation of market. Invests in giant cap shares and makes use of derivatives for hedging. Charges is 10% revenue share.
ABSL India Fairness Companies 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 appears to be like no completely different than a thematic providers oriented mutual fund equivalent to Sundaram Companies Fund or Mirae Nice Client Fund with an present observe document.
Layers of charges, mounted + 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.
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 Personal Fairness, VC area.
The tenure for this fund is 11 + 2 years – enormous to place off many buyers 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 firms 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 assume you’ve discovered an AIF that you just appear to have preferred. Earlier than you make investments although, listed below are just a few questions / info you possibly can ask to judge.
- What’s the AIF making an attempt 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 properly, say for holding simply 10 to fifteen shares, which will 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 you should exit halfway, for any cause?
- How will the fund make investments – instantly in firms or through one other fund (FOF)?
- Who’re the folks working the present? Background and observe document? Are you able to meet the fund supervisor?
- How will it talk with buyers? Frequency and the kind of reviews.
- Given the distinctive nature of the technique (hopefully), at what level will they are saying that the technique just isn’t working and return the cash to the buyers?
- What are the prices of funding administration?
- Is the payment charged on the whole dedication proper from the start or solely on the capital drawn?
- In case of mounted + revenue share, is the mounted value adjusted for the revenue share calculation?
- Is the hurdle fee with catch up, that’s, if the fund failed to fulfill the hurdle in a single 12 months, will the hurdle fee go up subsequent 12 months?
- Does the fund observe a excessive water mark precept, which means, will it cost charges after if it crosses the earlier worth at which charges was charged.
- Another expenses not explicitly said within the supply doc?
- What would be the taxation? Who pays the taxes?
- Is the efficiency assured? If not, what’s an affordable expectation vary to have, internet of prices and charges? Cautious there.
- Are you able to get just a few references of different shopper/buyers (together with purchasers who’ve withdrawn the funding)?
I suppose that submit this interrogation, you can find it simple to say NO to most pitches coming your means.
That’s the concept.
You want a big dose of endurance for AIF methods to work out.
Should you consider fastidiously, you may assume that you’re higher off with a less complicated, extra tax environment friendly and decrease value construction equivalent to Mutual Funds.
What about smallcases? Effectively, learn this.