What should Alternative Investment Funds bring to your portfolio?
₹8.3 trillion, as of 31 March. Even though it is a relatively new asset class, the low entry barriers have resulted in the proliferation of funds of all hues. So how should you be thinking about investing in these and evaluating performance of these funds.
Let’s start with asset allocation first. In India, AIFs that are sold, are somewhat different due to certain market peculiarities. Many of these funds essentially give investors the exposure to traditional asset classes such as public equities, high-rated bonds or real estate investment trusts.
Notice that all three will be part of your public equity or bond portfolio and are accessible through mutual funds (MFs), portfolio management services and exchange traded funds. These avenues are far more cost-efficient to access traditional asset classes as opposed to AIFs. Thus, it would be prudent to consider AIFs for those assets/strategies which are hard to access as an investor or require specialized knowledge or skills and an established track record.
Some asset classes and strategies that lend well to AIFs are: 1. Real estate: It is highly illiquid in nature, and requires scale and navigation skills (for an industry known for sharp practices). Within real estate, specialized sub-categories like shopping centres, offices, data centre, high-yield debt, etc., require special investment and management skills.
2. Stressed assets strategies: They are another example which is a legal and regulatory quagmire requiring turnaround capabilities, litigation strategies and a large scale to operate effectively. 3.
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