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

Given the latest spurt of belongings 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 instrument for ego therapeutic massage by Personal Wealth workplaces of Banks. The producers of the merchandise are very happy to oblige.  

Properly, let’s not get carried away and perceive what we’re stepping 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 area or hedge funds. They get to entry a a lot wider alternative set than the listed firm area obtainable to mutual funds and/or PMS.

There are 3 classes of AIFs, every with a definite position to play and a technique to seize worth.

a) Class 1 AIF – Startup investments – seed / angel funds, infrastructure funds. A minimum of 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 everyday operational necessities are handled as Class 2 AIFs. These embody debt funds, personal fairness funds, distressed asset funds, actual property funds. Once more, bigger portion of investments must be in unlisted area.

c) Class 3 AIF – Hedge funds, lengthy quick methods – energetic use of derivatives in addition to advanced, structured merchandise with leverage; This class has no explicit restrictions and might freely put money into listed firms as nicely.  

As you may discover, Class 1 & 2 AIFs can have loads of illiquidity. Additionally, Class 2 & 3 AIFs are pitched probably the most by banks to traders.

An AIF could be a good route so as to add extra diversification to your portfolio, supplied you ask all the proper questions.  

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

In distinction, with a PMS, you maintain the funding immediately in your title. The PMS entity is generally 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 embody, 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. 

By way of taxes, the revenue of the AIF is handed by means of to the investor and the investor is liable to pay the related taxes on the identical.

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Let’s take a fast have a look at among 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/quick methods primarily based on its evaluation of market. Invests in giant cap shares and makes use of derivatives for hedging. Charges is 10% revenue share.  

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ABSL India Fairness Companies Fund is a service centered 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 appears to be like no completely different than a thematic companies oriented mutual fund comparable to Sundaram Companies Fund or Mirae Nice Client Fund with an present monitor report.

Layers of charges, mounted + revenue share. 

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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 price.

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One more one is the most recent HDFC Choose AIF FOF – 1, which goals to put money into 10 or extra different AIFs within the Personal Fairness, VC area. 

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 by means of their respective VC/PE funds. 

To make that attainable, 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! 

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The inquiries to ask the AIF

Now, you suppose you’ve discovered an AIF that you just appear to have appreciated. Earlier than you make investments although, listed below are a number of questions / data you may ask to judge.

• What’s the AIF attempting to do? How is the technique distinctive, differentiated and distinct from something already on the market?
• Some AIFs can concentrate on focus of the portfolio as nicely, say for holding simply 10 to fifteen shares, which might not be attainable 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 to exit halfway, for any purpose?
• How will the fund make investments – immediately in firms or by way of one other fund (FOF)?
• Who’re the folks working 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 experiences.
• Given the distinctive nature of the technique (hopefully), at what level will they are saying that the technique is just not working and return the cash to the traders?
• What are the prices of funding administration?
  • Is the price charged on your entire 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 price with catch up, that’s, if the fund failed to fulfill the hurdle in a single yr, will the hurdle price go up subsequent yr? 
  • Does the fund observe a excessive water mark precept, that means, will it cost charges after if it crosses the earlier worth at which charges was charged.
  • Some other 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 affordable expectation vary to have, internet of prices and costs? Cautious there.
• Are you able to get a number of references of different consumer/traders (together with purchasers who’ve withdrawn the funding)?

I assume that submit this interrogation, one can find it straightforward to say NO to most pitches coming your approach. 

That’s the concept.

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

For those who consider rigorously, you may suppose that you’re higher off with an easier, extra tax environment friendly and decrease price construction comparable to Mutual Funds. 

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What about smallcases? Properly, learn this.

The submit [HNIs] Easy methods to say NO to an AIF funding?  appeared first on UNOVEST.

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