What are the 4 Main Categories of Alternative Investments?

Posted on Tuesday, January 9th, 2024 | By IndusInd Bank

The Alternative Investment Fund (AIF) industry has grown a massive seven times in the last five years. And they are becoming a preferred mode of investment for High Net Worth Individuals (HNI) (like you) who want risk-adjusted returns.

The reason is simple. Unlike stocks and bonds, these investments have a low correlation with public markets. Besides, they are privately pooled funds that allow investing in several different asset classes at once. Naturally, investing in AIFs is an excellent idea if you’re an HNI looking to invest large sums of money without considerable market risks.

But you must know the AIF categories specified by the SEBI (Securities and Exchange Board of India) before you start investing. After all, you’ll need to register in a particular category of funds to invest in them.

Types of Alternative Investment Funds

1. Category 1

These pooled funds invest in businesses with high growth potential. Funds investing in start-ups, SMEs, and other economically viable businesses fall into this category. Since these are high-capital investments, they dramatically affect the country’s economy. Naturally, investors receive incentives and concessions upon investing.

Now, different types of pooled funds invest in different kinds of companies. Here’s a better look.

●  Venture Capital Funds

These pooled funds provide large financing to companies looking to get up and running. So, the funds invest in high-growth prospects like start-ups. Even so, companies fail all the time. This is why most HNIs that opt for Category 1 VC funding use the high-risk, high-return funding strategy when investing.

●  Angel Fund

Similar to Venture Capital Funds, Angel Funds invest in start-ups. The key difference being Angel Funds invest in start-ups that failed to receive funds from Venture Capital Funds. Again, investing in such start-ups comes with considerable risk. Fortunately, investors can start investing as little as Rs. 25 lakhs.

●  Social Venture Funds

Social Venture Funds invest in businesses that positively improve the quality of life for people. These funds are known to offer reasonable returns, given the business would be profitable. They are a great investment mode for socially-conscious HNIs.

●  Infrastructure Funds

These funds invest in companies involved in building infrastructure for the country. Such companies include companies building ports, railways, etc. Investors who want predictable returns typically invest in such companies through Category 1 funds.

1. Category 2

Category 2 AIF funds that invest in equity and debt securities. These include-

●  Private Equity Funds

These funds invest in unlisted private companies by issuing debt and equity instruments. These funds come with some risk, given the funds are invested in securities of unlisted companies. Moreover, these funds have a lock-in period of 4-7 years. Even so, investors can exit the company after the set period after earning reasonable profits.

●  Fund of Funds

When investors invest in a fund of funds, they invest in a portfolio of other AIFs instead of choosing a single AIF category to invest in. Since the portfolio is diversified, investing in these funds comes with lesser risks.

●  Debt Funds

Unlisted companies with low credit scores release debt securities to raise funding. Investors can invest in such high-yield debt securities after considering the growth potential and the corporate practices of these firms.

1. Category 3

These funds offer short-term returns on investments through complex and diverse trading strategies. They include-

●  Hedge Funds

These funds collect capital from accredited and institutional investors and make strategic investments in domestic and international markets to maximize returns. They are usually expensive and are accompanied by aggressive fund management.

●  Private Investment in Public Equity

Here publicly sourced funds are managed privately and are used for public equity investments. Investors typically buy shares of publicly traded stocks at a slashed price when investing.

Over to You

Now that you know about the Alternative Investment Categories, you can start investing. Remember to properly understand the risks and returns associated with alternative investments before putting in your capital. Or use a wealth management service to help you figure it out.

If you’re an IndusInd Bank PIONEER account holder, you get access to personalized wealth management services at no extra cost. If you aren’t a PIONEER account holder yet, you can apply online now! Visit our website to learn more.

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.