Altsmart-Introduction to alternative investment funds 2

1. ALTSMART Introduction to Alternative Investment Funds - 2

2. How many AIFs are there at present? 209 funds are registered with SEBI as on March 31, 2016.

3. What are the recent developments in this sector? • In budget 2015, the govt. gave a tax pass through status to category 1 and 2 funds, whereby capital gains will be taxed at the hand of investors and not the funds. • The govt. also announced that foreign investments would be allowed in alternative investment funds (AIFs). It is expected that these funds will attract investments from NRIs and overseas institutions. The merger of FDI and FPI will minimize the administrative bottlenecks of investing and increase the flow of long-term capital.

4. What have been the recent trends in the AIF industry growth? • The total investments made by AIFs increased by nearly 29% to Rs.73568.1 million in the three-month period ending March 31, 2015.Further, the investments made by category I AIFs more than doubled from Rs.4089.6 million in the quarter ended December toRs.9609 million as on 31 March. • The investments of category II funds also registered a rise of nearly 22% from Rs.40133.7 million in the December quarter toRs.48678.7 million in the March quarter.

5. What are the latest development / update in the AIF sector? • On September 30, 2015, The Securities and Exchange Board of India (Sebi) has allowed alternative investment funds (AIFs) and venture capital funds (VCFs) to invest up to 25 per cent of their funds in Indian-owned companies having a front office abroad, but backoffice operations in India. • AIFs can also invest in equity and equity-linked instruments of offshore venture capital undertakings with Indian connection, subject to anoverall limit of $500 million,that includes the combined limit for AIFs and VC funds registered with Sebi. • Several Indian companies have been setting up their headquarters outside India, while their backend operations and/or research and developments are undertaken here.

6. What are Venture capital funds? Alternative investment funds offer many choices to the investors. One of them is “Venture capital funds”. • They invest in new companies and businesses which have innovative business models. • These companies and businesses can be from any sector OR in any investment theme. • They also have a strong internal due-diligence, risk assessment and monitoring capabilities by either having an internal team of experts and/or having tie-ups with external agencies which provide such services. • They may invest in equity OR in debt structures in these start-up companies. • These funds offer attractive returns in terms of IRR (Internal rate of return) in the range of between 19 to 35 per cent per annum to investors. • These returns are “gross” and are at the “fund level”. • Investors get “Net returns” which is after deducting “Fund management fees and other charges”

7. What are Hedge funds? Alternative investment funds offer many choices to the investors. One of them is “Hedge Funds”. • They employ a range of diverse, complex and aggressive strategies with an objective to target absolute returns and alpha under any given market conditions. (Alpha means excess performance over any given market index) • They can invest in any underlying financial product (example: equity stocks, derivatives, currency, bonds, and commodities) • They can use leverage (i.e. borrow money to trade in securities) and invest and trade in any security or its underlying derivatives, whether listed or unlisted. • They have their own internal team of researchers, analysts and fund managers to manage funds. • These funds offer attractive returns in terms of IRR (Internal rate of return) in the range of between 12 to 40 per cent per annum to investors. • These returns are “gross” and are at the “fund level”. • Investors get “Net returns” which is after deducting “Fund management fees and other charges

8. What are Infrastructure funds? Alternative investment funds offer many choices to the investors. One of them is “Infrastructure Funds” • They invest in companies which are building infrastructure projects in India. • Examples are companies which are executing projects in power generation, road, ports, airports, rail, bridges, dams etc. • They also have a strong internal due-diligence, risk assessment and monitoring capabilities by either having an internal team of experts and/or having tie-ups with external agencies which provide such specialized services to screen and recommend infrastructure projects. • They may invest in equity OR in debt structures of companies which are in the infrastructure benefits. Many of these companies are usually granted special concessions and tax incentives by the government. • These funds offer attractive returns in terms of IRR (Internal rate of return) in the range of between 15 to 25 per cent per annum to investors. • These returns are “gross” and are at the “fund level”. • Investors get “Net returns” which is after deducting “Fund management fees and other charges”

9. What are Real estate funds? Alternative investment funds offer many choices to the investors. One of them is “Real Estate Funds” • They invest in various real estate projects which could be commercial OR residential. • These funds usually have tie-ups with established real estate developers and construction companies for investments in such projects. • They invest either during the very initial land acquisition stage OR during the early construction stages. • Now-a-days due to the realty slowdown, many funds have started to invest at the stage when the construction is complete and some percentage of the entire project is sold / booked by customers. • They have a strong internal due-diligence, risk assessment and monitoring capabilities by either having an internal team of experts and/or having tie-ups with external agencies which provide such services. • They may invest in equity OR in debt structures in these projects. Many of them invest in debt instruments which are structured in such a way that the fund is able to earn between 19 to 30 per cent per annum. • These returns are “gross” and are at the “fund level”. • Investors get “Net returns” which is after deducting “Fund management fees and other charges”

10. What are Social sector funds? Alternative investment funds offer many choices to the investors. One of them is “Social Sector Funds” • They invest in companies which provide services to the social sector (i.e.: rural economy) in the country. Examples are companies which provide employment and projects in the handloom sector, artifacts, handicrafts, hand-made textiles, agro-products and other village-based small businesses. • These companies help generate livelihood and employment in India’s villages and semi-urban areas. They also benefit from government provided incentives in these areas. • They also have a strong internal due-diligence, risk assessment and monitoring capabilities by either having an internal team of experts and/or having tie-ups with external agencies which provide such specialized services. • They may invest in equity OR in debt structures of these companies. • These funds offer attractive returns in terms of IRR (Internal rate of return) in the range of between 10 to 17 per cent per annum to investors. • These returns are “gross” and are at the “fund level”. • Investors get “Net returns” which is after deducting “Fund management fees and other charges”

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