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Comparison with mutual funds (MFs) with assets under management (AUM) of approx. INRAt $67 trillion, AIF clearly has a long way to go. However, the field’s growth is often hampered by myths derived from anecdotal evidence, oversimplifications, or misrepresentations.
Let’s debunk these myths:
Myth #1: Alternatives are only for wealthy people and organizations
Alternatives such as private equity and venture capital were once reserved for institutional investors, but that has changed. Currently, retail investors can participate in AIFs through staged investment plans over two to three years or through direct investments in start-up companies.
Factors like increasing number of billionaires in India, innovative business ideas and the need for portfolio diversification to deliver better risk-adjusted returns are driving the adoption of AIFs. Professional fund management, regulatory reform and increased transparency will further support this trend.
Myth #2: Alternatives are inherently risky
All investments involve risk, but many alternative assets offer stability, especially against market volatility and inflation. For example, absolute return strategies aim to provide consistent returns regardless of market direction.
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AIFs with exposure to derivatives and real estate often have low correlation to traditional stocks and bonds, making them valuable hedges during times of economic turmoil.
Myth #3: Alternatives lack liquidity
The liquidity of alternative investments varies depending on the fund’s strategy.
For example, Category III AIFs provide liquidity on a biweekly, monthly, or quarterly basis. Most AIFs that focus on capital appreciation and regular cash flows, such as investments in private equity, credit, and real estate, typically have fund lives of three to seven years. Transfers are permitted within this period, subject to investment manager approval.
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Additionally, regulatory changes mandating the dematerialization of AIF units have enabled investors to leverage these investments for their financing needs.
Myth #4: AIF lacks transparency.
AIF is designed to be transparent, with frequent investor updates, monthly newsletters, NAV statements, portfolio disclosures and annual audited accounts. These measures ensure that investors are fully informed about strategies, portfolios, and associated risks.
Myth 5: You will be charged regardless of performance
Unlike traditional asset managers who charge fixed fees as a percentage of AUM, many AIFs have performance-based fees. These fees are only charged in cases of superior performance, ensuring that fund managers remain “in the game” and incentivized to achieve superior results.
Myth #6: Investing in one AIF provides diversification.
True diversification requires classifying AIFs into liquid, illiquid, and beta-plus strategies. Investors can allocate across these categories to align with goals such as capital growth, regular cash flow, and a favorable risk-return matrix.
Myth #7: AIF income is taxed at a higher rate.
Tax treatment varies by AIF category.
In Categories I and II, these are pass-through instruments, so the income is taxed in the hands of the investor. This includes capital gains or income excluding business income. For Category III AIFs, tax is applied at the fund level at the maximum marginal tax rate. This means that investors will not be subject to additional taxes on their returns.
Since the Securities and Exchange Board of India introduced the AIF Guidelines in 2013, the regulatory framework has been significantly strengthened. Measures such as independent audits, valuation standards, benchmarks, compulsory computerization, custody, clearing standards, and compliance filings have increased investor confidence.
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By dispelling these myths, AIFs emerge as a promising vehicle for asset diversification and wealth creation. Considering this asset class can redefine your investment strategy and open up opportunities for financial growth.
Amit Kothari is the COO of Alpha Alternatives.
