Understanding the risks in AIFs and PMS investments

livemint.com:

Mint that its fund generated a 6% annual return for its investors. ICICI AMC told Mint that it is looking to liquidate its remaining investment in the fund by next March, in line with AIF regulations. Market regulator Sebi allows one additional year post the expiration of the term to liquidate assets and make distributions to investors.

Mint could not independently ascertain the annual return generated by ICICI Prudential fund’s real estate AIF. On an absolute basis though, it returned 117% of the investment amount over the duration of the fund. Both these incidents highlight the inherent risky nature of AIFs.

The liquidity risk in AIFs is so grave that even some venture capital funds have been unable to sell their investments due to the ongoing startup funding winter, according to financial market experts. To be sure, AIFs are high-risk investments with a minimum ticket size of ₹1 crore. These instruments are meant for ultra high net-worth individuals with a very high risk appetite.

There are three categories of AIFs. Category 1 AIFs, which include venture capital funds, invest in start-ups or early-stage ventures or small and medium enterprises (SMEs). Category 2 AIFs include those funds that don’t take leverage or borrowings other than to meet daily requirements.

They also include funds that don’t come under either category 1 or category 3. This comprises real estate funds, private equity (PE) funds, and funds for distressed assets, etc. Category 3 AIFs are those that employ complex trading strategies and employ leverage through investment in listed or unlisted securities.