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Why HNIs should consider investing in AIFs

Why HNIs should consider investing in AIFs

30 May 2021

Driven by a high-performing market and low interest rates globally, India has increasingly become the preferred investment destination for global investors seeking double-digit returns. India attracted the highest ever FDI inflow of close to $70 billion during the first 9 months of FY 2020-21. It is, therefore, no surprise that millions of Indians are taking to more sophisticated investment vehicles and financial instruments as India continues to multiply wealth. This marks a paradigm shift from traditional physical assets, such as real estate, gold and bank deposits.

In addition to mutual funds and equities, alternative investment funds (AIFs) have witnessed significant interest from domestic investors.

What are alternative investment funds (AIFs)?
Alternative investment funds differ from regular conventional investments like public equities or debt securities. These funds are privately pooled funds which invest in venture capital, private equity, hedge funds, infrastructure, etc.

Currently, there are nearly 700 AIFs with over Rs 4 trillion in investments, an impressive 15x growth since 2015.

What’s driving AIFs in India
India is one of the fastest growing economies with a vibrant business ecosystem and the third largest startup ecosystem globally. Furthermore, Covid has resulted in major changes such as digitalization across industries, the rapid rise of health tech, widespread adoption of remote work, etc. The startup ecosystem, hence, is well poised to drive digital adoption in India and will be the real delta driving the economy in this decade. This is corroborated by the significant fundraising by India-focused funds in 2020, that raised $3 billion despite the pandemic.

In order to continue its fast-paced growth, however, infrastructure conforming to global standards is imperative for our country. AIFs have provided a viable route to make investments in public and private infrastructure much more accessible to investors who wish to capitalize on the opportunity presented by the development needs of India. This serves as a lucrative investment alternative for investors while contributing significantly to the overall economic growth.

To put things into perspective, India has already seen a record number of 12 companies attain unicorn status to date in 2021. Additionally, more startups are getting public-market ready and set to launch their IPOs. These are strong indicators of the Indian market moving towards maturity. AIFs stand to benefit from the developments taking place in the venture ecosystem in addition to the overall infrastructure development drive by public and private players alike.

Growth of AIFs in India
The key growth enabler for AIFs has been the funds’ ability to customize and curate products across asset classes. These funds are managed by experienced fund managers who adopt sophisticated strategies. Therefore, these funds do not correlate to the stock market, and help investors add diversification and reduce volatility in their portfolios. Proprietary investment techniques coupled with strategic diversification has led to higher returns compared to mutual funds, stocks and bonds.

The growth must also be attributed to growing investor awareness and flexibility in product offerings. More HNIs are setting up professionally-run family offices with specific investment mandates and allocation strategies. Investors can appropriate a portion of investable capital to different alternative products based on their risk appetite and target returns.

AIFs funds are generally subject to higher volatility, liquidity and credit risks than investments in traditional securities, which may act as a deterrent for investors. Investors today, however, have access to various products that offer high liquidity and low volatility. Most importantly, well-managed funds with a keen focus on comprehensive credit analysis and monitoring can greatly reduce the credit risk involved. For example, venture debt has the potential to yield high double-digit returns with reasonable certainty owing to the nature of the product. It also allows investors to participate in the equity upside, while earning a relatively predictable return on the debt component with regular payouts.

Although a long way to go, the investment narrative of India is changing as investors have started to embrace India’s growth story with domestic investors playing a pivotal role. This is driven by the belief that the country can build shared prosperity by transforming the way the economy creates value.

(Ishpreet Singh Gandhi is the Founder & Managing Partner of Stride Ventures. Views are his own)