I am not qualified to say whether you should invest in an AIF, I am just saying “what should be the pre-qualification in an AIF?

If your LIQUID net-worth is less than Rs. 10 crores (I mean other than the earmarked GOALs money) and you are willing to risk say 50% of your capital, while running liquidity risk, and a long(er) lock-in, you should think of investing in AIF. It is clearly pure risk money which could see large standard deviation, and if you don’t have an idea of how the fund will be liquidated, be AWARE of the risks involved.

According to SEBI, an AIF is a “fund established or incorporated in India, which is a privately pooled investment vehicle, that collects funds from sophisticated investors, whether Indian or foreign, for investing it by a defined investment policy for the benefit of its investors.”

I see AIF (also PMS) largely trying to overcome the constraints in a mutual fund. An AIF can invest in RE, private debt, stressed assets, can go short, can buy puts, can trade in equities (which is different from invest in equities), etc. – which a normal MF cannot. It can be part of a Venture fund, a distressed RE and give it on rent – create a REIT…etc. A lot of freedom is given because a ‘sophisticated’ investor is supposed to be able to understand better, seek Legal / investments help and then decide. He should read the Investment Philosophy statement and see whether the interest are aligned with the fund.

I would be personally very scared of raising money and appointing a ‘fund manager’ for managing Venture funds in India. Given the quality of our balance sheets and Auditors (esp the big 4) how many investments can a fund make in a year? The worry is VC business does not lend itself to fast decisions and meeting deadlines. So once more FM will take decisions based on nonsense like “Rakesh Jhun…has invested” or “Vallabh was the first round investor” or some such shit. Like all fund houses are saying “ILFS was quasi-gilt”. Gimme a break. If I had to put Rs. 1 crore in a VC fund, I would put in a fund where I know the other 20 people who have committed funds – maybe I am a small holder and the biggest holder has put Rs. 30 crores. I would be very wary of who is going to handle my VC money. Remember if there is manager under performance or your NAV goes down dramatically, you have no option but to wait.

I love liquidity on most of my portfolio..what is the point in investing in a completely ill-liquid asset? One day the VC will put pressure and they will do a sub-optimal dilution for sure.

If you invest in a mutual fund at least you can be sure that many people are watching the fund. I remember asking a FM why she was still invested in Bharti Airtel and TaMo DVR. Her reasons were not too good, but I liked her conviction in her portfolio. Also remember the reward for selling AIF is better than selling products like Mutual fund – which is now almost selling itself with a little nudge from the regulator, amfi, media, public, etc…..So if you have bought some luxury product, or made a big FD with a bank…they will start pushing AIF on you nicely packed with a “loan” to buy it, and a Loan Against shares…once you finish buying it. Be alert.

Personally I would stay out of an AIF. Unless it is a friend who starts one and shares the Investment Philosophy Statement with me. Or of course, he asks me to set up an AMC to do start up funding…