Lowering of investment limit will make AIFs accessible to more investors

Risk of mis-selling of these funds to investors who don't understand their risks fully may also rise

The Securities and Exchange Board of India (Sebi) committee for deciding the investment norms of alternate investment funds (AIF), headed by former Infosys chairman N R Narayana Murthy, may recommend lowering of the minimum investment limit in them from Rs. 1 crore to Rs. 25 lakh, according to media reports. This will bring the minimum limit for investment in AIFs at par with that for portfolio management services (PMS). The committee is expected to submit its report by the end of this month.

Mutual funds and PMS allow investors to invest only in a few basic asset classes -- equities, debt and hybrid. AIFs, on the other hand, offer exposure to high net worth individuals in a variety of options, such as venture funds, private equity funds, real estate funds, hedge funds, infrastructure venture funds, social venture funds, and equity and equity-related funds. These funds are well suited for investors who can take a higher degree of risk, and wish to diversify their portfolios into newer asset classes.

Financial advisors say that lowering of the investment limit, if it happens, will be a positive. "At Rs. 1 crore, the pool of investors who could invest in these funds was very small. If the limit is lowered, more investors will become eligible to invest in them," says Mumbai-based financial planner Arnav Pandya. 

Deepesh Raghaw, founder, PersonalFinancePlan.in, a Sebi-registered investment advisor (RIA) adds: "Investors will be able to diversify their portfolios further. These funds also offer the potential for higher returns."  

However, lowering of the investment limit will also give rise to certain risks. "Many people who do not understand how these funds work and the risks inherent in them could also invest," says Pandya.

Many of the investments that private equity funds and venture capital funds make don't work out. During bear phases, exiting their investments become difficult for these funds. Venture capital funds invest in very early stage companies. Private equity funds invest in later stage companies also, but primarily in the unlisted space. All these companies are young and their failure rate tends to be high. Real estate and infrastructure funds, which AIFs also invest in, have a long gestation period, low liquidity, and so on. Sometimes the projects they invest in don't give the expected returns upon completion.  

Lowering of the investment limit also raises the chances of mis-selling. "These products could be sold to individuals whose net worth is not very high. These funds could come to comprise a very high portion of an individual's total portfolio," says Raghaw.

Investors should also be aware that many of the funds that AIFs invest in come with a lock-in period, and some categories of AIFs too have their own lock-in periods.