AIF assets nudge past Rs 5 trn mark, still a seventh of MF industry size

The AIF segment has grown more than 8x in past five years

The assets of alternative investment funds (AIFs) have crossed the psychological Rs 5-trillion mark as an increasing number of wealthy investors scout for alternatives to de-risk their portfolios and maximise returns.

Assets of the AIF industry stood at Rs 5.35 trillion at the end of September quarter, a 32 per cent rise over the same period in the previous year. The industry has grown more than eight times in the past five years from assets of 0.65 trillion.

AIFs have a minimum ticket size of Rs 1 crore and aim to offer investors access to sophisticated strategies across different asset classes.

“AIFs offer risk-return combinations with professional management which other vehicles like mutual funds or PMS (portfolio management services) or direct investment cannot offer. Some of the factors for the rapid growth of AIFs are related to the growth of the wealth management industry and rising affluence as well as investment savvy among high net worth individuals, family offices and institutions,” said Aashish P Somaiyaa, Chief Executive Officer, White Oak Capital Management.

He added that the rise of entrepreneurial activity, especially in the digitally-enabled consumer and financial services space, the need to attract capital and the demand for exposure to these businesses had also aided AIF growth. “Category 2 AIFs which cover most of the unlisted equity and real estate space have been the biggest beneficiary of these trends.”

The assets of category II funds form 80 per cent of the total AIF industry. Funds which do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements are classified as category II. These include real estate funds, private equity funds and funds of distressed assets.

Vikas Sachdeva, chief executive of Emkay Investment Managers said: “Recent years have seen the global alternative industry grow at a rapid pace. This is largely driven by a need to enhance returns and increase diversification. This growth is also supported by external conditions such as lower interest rates, availability of information, the maturation of emerging markets, and a structural change in capital formation. Given the current state of the industry, and the recent developments in regulations it is expected that India’s alternative industry will follow the global trend and take a greater share of India’s investable universe.”

As PMS and AIF products generate healthy returns, achieve better penetration and thrive in a favourable regulatory landscape, the industry is expected to cross Rs 50 trillion on the back of 20 per cent CAGR growth by 2031, according to PMS Bazaar.

“Given the rich valuations in the listed space, investors are looking at alternatives such as structured credit, venture capital and private equity funds, real estate funds and long-short strategies in category III, all of which may have little correlation with long equities,” said an industry official.

He added that several investors found it more convenient to invest in equities through AIFs rather than the PMS route. “All the transactions and taxation for AIFs happen at the trust level, the documentation is simpler, and there is flexibility in pacing out investments as drawdowns happen over a period of time,” he said.

Despite the breakneck growth, the AIF industry is still one-seventh the size of the MF industry, which had assets of Rs 37.4 trillion at the end of September, a growth of 39 per cent over the previous year. The PMS segment where the minimum ticket size is Rs 50 lakh managed Rs 22.7 trillion under discretionary portfolio, Rs 1.44 trillion under non-discretionary, and Rs 2.23 trillion under advisory as per latest Sebi data.