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High networth individuals (HNIs) and Ultra HNIs (UHNIs) have significantly increased their allocation to Alternative Investment Funds (AIFs), according to Sebi data.
It has gone up by 42.5% over a year– from Rs 4.87 lakh crore in June 2021 to Rs 6.94 lakh crore in June 2022. The larger part of it has gone to AIF Category-II funds, which saw a 43.7% rise y-o-y, with commitments raised going up from Rs 3.9 lakh crore in June 2021 to Rs 5.6 lakh crore in June 2022.
AIFs are of three kinds – Category I, Category II and Category III, and they invest pooled private funds. They have higher investment floors and are generally considered riskier than regular mutual funds because they are allowed to invest in unlisted securities and most can use borrowed funds. AIF Category II funds aren’t allowed to use borrowed funds other than for their operational expenses.
AIF Category-I funds invest in early-stage businesses including startups in sectors that the government believes are socially or economically desirable, and therefore can have a spillover effect for the larger economy. This fund may be offered incentives to encourage investments in it. Category III funds use high risk investment strategies, and unlike Category I and II, can be open-ended. Both Category I and Category III can borrow funds for investments, but the first can only do so for a limited period of time while the second has no such constraint.
Vishal Chandiramani, Managing Partner – Products, and COO at TrustPlutus Wealth (India), said that there were various factors at work. “Youngsters in several HNI families are getting involved in some of the investment decisions and there is increased awareness (about the investment opportunity) now. Media stories that talk about employees in start-ups making millions also act as an agent,” he told Moneycontrol.
Then there is the function of low interest rates. “Over the last couple of years, barring the last few months, we’ve seen interest rates at record lows post Covid-19 pandemic. Therefore, HNI families who are looking to increase their return on the fixed-income portion of their portfolio consider these investments. Debt mutual funds offering 5-6% post-tax return does not look appealing because somewhere people still expect debt investments to give 7-8% return,” he added.
With rising interest rates, investors should be mindful about the risks of lending through relatively new instruments such as venture debt and the like. For example, money may start to dry up for startups and they might find it difficult to service their debt. “While it is good to diversify, it is also important to invest with the right managers who have a strong track record because a lot of these products have not really seen a complete market cycle in a country like India,” cautioned Chandiramani.
“It’s not to say that you shouldn’t invest in them but the proportion to the portfolio should be right,” he said.