Why do investors prefer category 3 AIFs to diversify portfolios? MintGenie explains
Alternative investment funds (AIF) in this context have emerged as a preferred asset class among investors who are seeking the provision of diversification. Among the three types of AIFs, category 3 has gained significant traction over the years. This is due to its several benefits, such as a high return and a long investment horizon, and largely to its ability to provide significant diversification.
In the realm of investing, the adage "Don't put all your eggs in one basket" is very accurate. Thus, diversification is a vital risk-reduction tactic, and AIFs provide access to a wider variety of assets than only conventional fixed-income securities and stocks. Alternative investment funds offer more options, with many of them having the capacity to diversify and boost returns on investment.
These investment vehicles, in contrast to conventional equities, bonds, and mutual funds, provide investors with fresh and innovative approaches to maximising their wealth. According to SEBI, the AIF industry experienced 30% annual growth in FY 2022–2023 and surged from Rs. 6.41 lakh crore from the previous year to Rs.
8.34 lakh crore in March 2023. Category 3 AIFs specifically have prompted a number of improvements. These investment vehicles generally focus on growth-oriented companies, including large, mid, and small-cap companies, and the results they have been providing are remarkable.
According to a report by PMSBazaar, despite the market corrections, 60 out of 61 category 3 AIFs outperformed Nifty 50 in August 2023. This showcases that, apart from acting as a cushion in market volatility or a financial crisis, these funds have the potential to deliver robust returns. While AIF category 3 can be a strategic move for investors
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