The Truth Before Committing Your Wealth To An Alternative Investment

The importance of asset class needs a thorough understanding to realise the profits.

The Indian economy lately has emerged from severe financial distress and staring at better prospects. It is to be noted that there is an apparent increase in the wealth of the country encouraging investors to look beyond the current horizon. During 2012, the asset class was formally launched and at present has more than 500 funds registered. According to SEBI, as of September 2018, Alternative Investment Funds (AIFs) have got commitments worth INR 180000 crores and have raised nearly INR 100,000 crores. On the flip side, these funds have invested close to INR 75,000 crores.  AIFs is being preferred as an effective substitute, a safe investment as it helps investors in circumventing tax leakages.  As a beginner, here are some handy tips before adopting them and getting serious about it.

The Right Awareness: 

AIFs has been existing for quite some time now but to invest you need a better understanding of the asset. Even more critical is its alignment with your goals. It’s natural to invest in assets that have the potential to reap huge profits, but AIFs are a different ball game. Investments in AIFs increased to approximately 30% in 2018. These figures can be inviting but should never interfere in your clarity of investment goal and ability. It is advisable to take a wise decision following the evaluation of these assets. 

Mindful Of Fees: 

Fund managers are quick while convincing you to pledge for the investments as its part of their job and targets to be achieved. Investors are required to dedicate quality time in evaluating the fees structure, returns after all the expenses and taxes. There is a likelihood of oversight by investors on the justification by fund managers.  Remember, being ignorant is a trait not acceptable for investors of AIF. 

Liquidity factors: 

A thumb rule in allocation to the asset class is to determine the risk, age, and liquidity. Liquidity is primarily affected in AIFs as they generally invest money in SMEs, real estate, Start-ups, etc. The allocation in the unlisted space usually ceases the liquidity and hence the ability to hold these assets for a longer duration, unlike mutual funds, becomes insignificant.  An exception in AIFs is invoice discounting, a safe investment that manages to ease and maintain the liquidity under all circumstances.

Fund Manager Check:

The credibility of fund managers is essential as their ideas can fall short for investors.  The best instance was the private equity space about a few years ago, that attracted several ambitious investors with disappointing outcomes. This almost crippled the investors and had no room to compensate for the loss incurred. AIFs may well repeat this.  In the longer run, investors should be conscious before laying their hands-on AIFs because the commitment will force you to continue the course and parallelly experience the pain.  Investors had started to vouch for AIF as a means of investing in the debt portfolio during 2017 when such investments reached an all-time high of debt investments in 2017, wherein the debt limits for FPIs were getting rapidly exhausted. On the whole, having briefed on the risks associated with AIFs, there are great products, ideas and fund managers in the category that can promise profitable results. Ideal market conditions aid in bolstering AIFs and rewarding. An even more promising factor in considering AIF is the assistance received in the form of incentives or concessions by the government of India.