[HNIs] The best way to say NO to an AIF funding? 


The HNI and UHNI (together with NRI) investor has a ‘new’ pitch – the AIF or an Various Funding Fund.

Given the current spurt of property 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 Personal Wealth places of work of Banks. The producers of the merchandise are more than pleased to oblige.  

Properly, 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 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. 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 daily operational necessities are handled as Class 2 AIFs. These embrace debt funds, non-public fairness funds, distressed asset funds, actual property funds. Once more, bigger portion of investments must be in unlisted house.

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

As you’ll be able to discover, Class 1 & 2 AIFs can have a whole lot of illiquidity. Additionally, Class 2 & 3 AIFs are pitched essentially the most by banks to traders.

An AIF is usually a good route so as to add extra diversification to your portfolio, offered you ask all the appropriate questions.  

Know that, very similar to mutual funds, an AIF can be a pooled funding, the place you’re allotted items in opposition to your funding wit. 

In distinction, with a PMS, you maintain the funding immediately in your identify. The PMS entity is usually 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 price and/or variable, that’s, revenue share / carry.  

The mounted charges embrace, placement price / setup price, operations price, taxes, and so forth.

My view is that such methods ought to have solely revenue share and no mounted charges. 

When it comes to taxes, the earnings 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 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/brief 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.  

ABSL India Fairness Providers Fund is a service targeted multicap AIF . 

It isn’t 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 seems to be no totally different than a thematic providers oriented mutual fund corresponding to Sundaram Providers Fund or Mirae Nice Client Fund with an present monitor report.

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 charge.

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

The tenure for this fund is 11 + 2 years – large 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 firms via their respective VC/PE funds. 

To make that doable, 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! 

The inquiries to ask the AIF

Now, you suppose you have got discovered an AIF that you just appear to have preferred. Earlier than you make investments although, listed below are a couple of questions / data you’ll be able to ask to guage.

  • 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 deal with focus of the portfolio as effectively, say for holding simply 10 to fifteen shares, which is probably not doable 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 is advisable exit halfway, for any purpose?
  • How will the fund make investments – immediately in firms or through one other fund (FOF)?
  • Who’re the individuals operating the present? Background and monitor report? Are you able to meet the fund supervisor?
  • How will it talk with traders? Frequency and the kind of stories.
  • Given the distinctive nature of the technique (hopefully), at what level will they are saying that the technique shouldn’t be working and return the cash to the traders?
  • What are the prices of funding administration?
    • Is the price charged on the whole dedication proper from the start or solely on the capital drawn?
    • In case of mounted + revenue share, is the mounted price adjusted for the revenue share calculation?
    • Is the hurdle charge with catch up, that’s, if the fund failed to fulfill the hurdle in a single yr, will the hurdle charge go up subsequent yr? 
    • Does the fund comply with a excessive water mark precept, which means, will it cost charges after if it crosses the earlier worth at which charges was charged.
    • Another costs not explicitly acknowledged within the provide 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 shopper/traders (together with purchasers who’ve withdrawn the funding)?

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

That’s the thought.

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

In case you consider fastidiously, you would possibly suppose that you’re higher off with an easier, extra tax environment friendly and decrease price construction corresponding to Mutual Funds. 

What about smallcases? Properly, learn this.

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