Exploring the Value of Alternative Investment Funds in Your Portfolio

Alternative Investment Funds (AIFs) have emerged as a significant component in the portfolios of many high net worth individuals (HNI) and family offices. According to the Securities and Exchange Board of India (SEBI), AIFs have raised an impressive total amount of ₹8.3 trillion as of 31st March. Despite being a relatively new asset class, the accessibility and low entry barriers have led to the proliferation of various funds with distinct characteristics. In this article, we will delve into the considerations for investing in AIFs and evaluating their performance, focusing on asset allocation and specific strategies that lend well to these alternative investment vehicles.

Asset Allocation: An Introduction to AIFs in India

In India, the AIFs available in the market often differ due to specific market peculiarities. The exposure to well-known asset classes such public stocks, AAA-rated bonds, and real estate investment trusts is provided by many of these products. These assets are typically accessible through mutual funds (MFs), portfolio management services, and exchange-traded funds, which generally provide a more cost-efficient means of investing in traditional asset classes compared to AIFs.

Therefore, it becomes crucial to consider AIFs for assets or strategies that are challenging to access as a regular investor, necessitate specialized knowledge or skills, and have an established track record. Some asset classes and strategies that align well with the unique benefits of AIFs include:

1. Real Estate

Real estate, being highly illiquid in nature, requires scale and navigation skills to succeed, especially in an industry known for sharp practices. Specialized sub-categories like shopping centers, offices, data centers, and high-yield debt, demand particular investment and management skills, making AIFs an attractive option for such investments.

2. Stressed Assets Strategies

Stressed assets strategies are another example that involves legal and regulatory complexities, requiring turnaround capabilities, litigation strategies, and significant scale to operate effectively. AIFs can provide the necessary expertise and structure to tackle these challenges successfully.

3. Private Equity

Private equity investments are highly illiquid and demand a profound understanding of businesses, the ability to underwrite sound management quality, and provide support to the company in various aspects. AIFs can offer a suitable platform for investors seeking exposure to private equity opportunities.

Currently, the majority of AIFs in India concentrate on private equity or real estate debt strategies. However, with the tax concession on debt mutual funds being leveled with other forms of debt investments, the future is likely to witness more AIFs adopting credit strategies.

Considerations Before Investing in an AIF

Before committing to an AIF, there are several essential considerations to ensure a well-informed decision:

1. Investment Strategy Or Investment Funds

Examine the investment strategy carefully. If you already have exposure to the proposed strategy through your existing equity and debt portfolios, it may be redundant to allocate to the same “alternative assets.”

2. Track Record and Experience

Track record and experience are critical factors in AIF investments. Given the specialized nature of these assets, the expertise and talent of the investment management team play a significant role in determining success. Look for team consistency and cohesion, as well as their commercial alignment with the fund’s performance outcomes. This is especially important since AIFs often have long lock-in periods, and the stability of the management team is crucial for achieving the targeted results.

3. Additional Factors Of Investment Funds

There are more elements to evaluate, including the vintage of the funds and issues with related party transactions, among others. The market regulator, SEBI, has set a minimum requirement of ₹1 crore commitment amount for AIFs, which may be raised further to ensure better alignment with investor interests.

The Importance of Informed Decision-Making

It’s essential to acknowledge that some AIFs in the market have been one-trick ponies, facing challenges as their investments turn illiquid towards the end of their life cycles, leading to investor dissatisfaction. While some distributors of AIFs conduct due diligence, the ecosystem is still evolving, and there is much to be learned. As an investor, conducting thorough research is essential, but it is equally prudent to seek advice from a qualified investment advisor with a deep understanding of these products and access to rich data for evaluating performance.

SEBI has taken steps to mandate the disclosure of performance records, but this is still in a nascent stage of refinement. Therefore, relying on the expertise of knowledgeable individuals becomes crucial in making informed investment choices.


In conclusion, considering alternative investment funds (AIFs) in your portfolio can add diversification and exposure to unique assets and strategies that may not be easily accessible through traditional investment avenues. It is essential to assess the investment strategy, track record, and experience of AIFs before making any commitments. Seeking advice from qualified investment advisors can be valuable in navigating the intricacies of AIF investments and avoiding long-term challenges.

Frequently Asked Questions

1. What are Alternative Investment Funds (AIFs)?

AIFs are investment vehicles that pool funds from investors and employ different strategies to generate returns. They often invest in assets beyond traditional stocks and bonds, offering opportunities for diversification.

2. Why should I consider AIFs in my portfolio?

AIFs provide access to alternative assets and strategies that may offer unique returns and risk profiles compared to traditional investments, potentially enhancing the overall diversification of your portfolio.

3. Are AIFs suitable for all investors?

AIFs are typically best suited for high net worth individuals and institutional investors due to their higher entry requirements and unique risk characteristics.

4. How can I evaluate the performance of an AIF?

When evaluating the performance of an AIF, consider factors such as track record, experience of the management team, investment strategy, and alignment of interests with investors.

5. Should I seek professional advice before investing in an AIF?

Yes, seeking advice from a qualified investment advisor with expertise in AIFs can provide valuable insights and help you make informed decisions aligned with your financial goals and risk appetite.

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