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 device for ego therapeutic massage by Non-public Wealth places of work of Banks. The producers of the merchandise are very happy to oblige.  

Properly, let’s not get carried away and perceive what we’re moving 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 house or hedge funds. They get to entry a a lot wider alternative set than the listed firm house out there to mutual funds and/or PMS.

There are 3 classes of AIFs, every with a definite function to play and a way to seize worth.

a) Class 1 AIF – Startup investments – seed / angel funds, infrastructure funds. Not less than 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 aside from everyday operational necessities are handled as Class 2 AIFs. These embody debt funds, non-public fairness funds, distressed asset funds, actual property funds. Once more, bigger portion of investments needs to be in unlisted house.

c) Class 3 AIF – Hedge funds, lengthy quick methods – energetic use of derivatives in addition to complicated, structured merchandise with leverage; This class has no explicit restrictions and might freely put money into listed corporations as effectively.  

As you may discover, Class 1 & 2 AIFs can have numerous illiquidity. Additionally, Class 2 & 3 AIFs are pitched probably the most by banks to traders.

An AIF generally is a good route so as to add extra diversification to your portfolio, supplied you ask all the correct questions.  

Know that, very similar to mutual funds, an AIF can 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 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 include mounted price and/or variable, that’s, revenue share / carry.  

The mounted charges embody, placement price / setup price, operations price, taxes, and many others.

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 by way of to the investor and the investor is liable to pay the related taxes on the identical.

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Let’s take a fast take a look at a number of 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 massive cap shares and makes use of derivatives for hedging. Charges is 10% revenue share.  

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ABSL India Fairness Providers Fund is a service targeted 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 similar to Sundaram Providers Fund or Mirae Nice Shopper Fund with an present observe file.

Layers of charges, mounted + revenue share. 

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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 set + variable charges with a hurdle fee.

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One more one is the newest HDFC Choose AIF FOF – 1, which goals to put money into 10 or extra different AIFs within the Non-public Fairness, VC house. 

The tenure for this fund is 11 + 2 years – enormous 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 by way of their respective VC/PE funds. 

To make that potential, it has a number of layer of prices – setup, administration price, working price, revenue share over and above what different fund mangers will cost. Good luck! 

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The inquiries to ask the AIF

Now, you assume you may have discovered an AIF that you simply appear to have preferred. Earlier than you make investments although, listed below are a couple of questions / info you may ask to guage.

• 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 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 it’s essential to exit halfway, for any purpose?
• How will the fund make investments – straight in corporations or by way of one other fund (FOF)?
• Who’re the individuals working the present? Background and observe file? Are you able to meet the fund supervisor?
• How will it talk with traders? Frequency and the kind of reviews.
• Given the distinctive nature of the technique (hopefully), at what level will they are saying that the technique will not be working and return the cash to the traders?
• What are the prices of funding administration?
  • Is the price charged on the complete 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 yr, will the hurdle fee go up subsequent yr? 
  • Does the fund observe a excessive water mark precept, that means, will it cost charges after if it crosses the earlier worth at which charges was charged.
  • Some other 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 inexpensive expectation vary to have, internet of prices and costs? Cautious there.
• Are you able to get a couple of references of different consumer/traders (together with purchasers who’ve withdrawn the funding)?

I assume that put up this interrogation, you will see that it simple to say NO to most pitches coming your manner. 

That’s the concept.

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You want a big dose of endurance for AIF methods to work out. 

In case you consider rigorously, you would possibly assume that you’re higher off with a less complicated, extra tax environment friendly and decrease value construction similar to Mutual Funds. 

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What about smallcases? Properly, learn this.

The put up [HNIs] say NO to an AIF funding?  appeared first on UNOVEST.