With the rise in the buzz of the Category-III AIF and a growing number of individuals keen on entering this promising space, there are a few factors an investor has to keep in mind before committing to any particular Cat-III fund
AIF’s popularity in India has been on an upward trajectory since its introduction in 2012. They can be seen as an efficient tool for HNIs to increase the diversity of their portfolios which in turn leads to the minimisation of potential risk, while concomitantly providing a form of passive income. With the rise in the buzz of the Category-III AIF and a growing number of individuals keen on entering this promising space, there are a few factors an investor has to keep in mind before committing to any particular Cat-III fund.
1. Tax-efficiency
It is paramount that a soon-to-be AIF investor considers the amount of tax that would be subjected to their investment. The tax-efficiency of an AIF would be dependent on the strategy that they employ. Different financial commodities are taxed at different rates, for example, long term capital gains are taxed at 11.96%, short term capital gains at 17.94% and derivatives at 42.74%. A client’s investment would be generally divided in a combination of asset classes and therefore influencing the final tax blend that the investor would be required to pay.
2. Personal Affinity for Risk
It is imperative for an investor to assess their own appetite for risk. The ones looking for safer investments can generally expect lower levels of yield and the opposite is true for those who go for riskier investments. As an investor, one should look to find a fund that would fall most inline with their own ethos. AIFs often offer different funds that vary in the risk level and rate of return.
3. Track Record
The existence of a dependable track record would be vital to consider, as an investor the fund’s past track record would serve as a good indicator of its future performance. Similarly, for funds in their infancy with little to no track record, investors should assess the track record of the individuals involved in the fund to better gauge its reliability.
4. Management Fee and Performance Fee
AIFs generally charge their investors certain fees on their investment. These can be broken down into their management fees and their performance fees. Management fees would entail the client having to pay a fixed amount to the fund when investing their money, while performance fees are charged on the annual gains made by the fund. Some funds on the other hand charge no management fees whatsoever. They do this by only having HNI or Ultra-HNI clients, since they inject a larger amount of capital into the fund.
5. Level of Disclosure
The level of disclosure would vary depending on the fund. Investors should ideally look for an AIF that is transparent and provides them with an investment tracking portal of sorts to help them monitor their investments. This client- aligned model enables the investor to reach a higher level of trust in their investment and builds a better relationship with their fund.
6. Custodian
An AIF having a custodian increases the reliability, security, and trackability a client has on the fund. A custodian refers to an external third party who is entrusted with holding onto and monitoring the client’s investment. It acts as a check on the fund and prevents it from non-governance utilization of the client’s investment, thus the importance of a custodian.
7. Ease of Investment and Ease of Redemption
Finally, convenience to the investor is always a key factor in attracting investment for a fund. An AIF must be able to make the investment as effortless as possible to the client. Furthermore, the ease of redemption is decisive in being able to retain a client. The fund should bestow the right to the investor to be capable of withdrawing his capital in a flexible manner.
It is prudent for an individual to evaluate these factors to efficiently allocate their capital and diversify their investments in a sustainable manner.
Source: Business World
