According to Benjamin Graham, the father of value investing, “The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.” Even as we remain committed to the principles of sound investing, and maintain exposure to the traditional asset classes which have managed to stand the test of time, the ongoing changes in the financial mechanisms and climate is now prompting investors to look at alternate avenues of investment. Standing apart from the traditional avenues such as equity, debt, commodities and real estate, alternate investments are witnessing strong traction owing to a variety of pressing factors. Here is everything you need to know about Alternative Investment Funds and Portfolio Management Services, two optimal routes to capitalise on the alternate investment landscape and a detailed primer on why this is the best time to do so.
Understanding AIF and PMS
AIFs are investment vehicles which facilitate investments in non-traditional assets and strategies like private equity, venture debt, long/short equity, and structured credit. Just like mutual funds, AIFs also gather capital from multiple investors and allocate it strategically but this is where the similarity ends. While mutual funds invest in traditional assets, AIFs park their funds in carefully chosen hedge funds, private equity, venture capital, and other non-conventional investments. These funds can be established in the form of a company or Limited Liability Partnership and come in three categories. In recent years, AIFs have been witnessing robust investor attraction with data from the Securities and Exchange Board of India indicating that the industry’s assets under management has risen from INR 6.94 lakh crore, a year ago, to INR 8.45 lakh crore in June 2023.
Separately, PMS platforms grant access to focused or customised portfolios primarily comprising publicly traded securities. They are overseen by skilled portfolio managers who conduct research and trading activities with the aim of outperforming the market and optimising returns while managing risk effectively. With strong traction from new age investors keen on tapping alternative avenues, the AUM of Indian PMS platforms has trebled between 2016 and 2023, touching INR 28 lakh crore in March. The key disparities between the two investment avenues centre on the minimum investment threshold, fund structure, and lock-in period - while a PMS typically necessitates a minimum investment of INR 50 lakhs, AIFs require a higher entry point of INR 1 crore. PMS investors have direct ownership of the securities in their portfolios and can redeem at will, whereas AIFs are usually close-ended with predetermined lock-in periods.
Key advantages to consider
are a variety of benefits that investors can unlock, when they add alternative assets such as AIFs and PMS to their portfolios. Firstly, these avenues are known to offer higher risk-adjusted returns than traditional assets, owing to their focus on niche markets and underpriced assets. Separately, given their low correlation to traditional assets, these platforms ensure robust returns even in volatile markets, thereby limiting the downside on your portfolio and acting as a hedging mechanism. Thirdly, they enable you to enjoy heightened diversification, given their ability to offer exposure to a variety of still largely untapped investment avenues, thereby ensuring that all your eggs are not placed in one traditional basket.
Decoding the persona of alternate investors
Is this the right time for you to pivot towards alternates? To begin with, you should ensure that the investment strategy of AIFs and PMS platforms is aligned with your risk appetite, return requirement, time horizon and financial goals. Secondly, veer towards alternates only after you have dabbled in traditional assets and have a strong understanding of the overall investing ecosystem, to avoid erroneous judgement. Finally, only invest a part of your portfolio in AIFs and PMS platforms, while continuing to maintain your positions in traditional assets, to ensure diversification and risk mitigation in the evolving financial landscape.
There is no doubting the fact that alternates are the future of investment, and this could be the right time for you to take the first step towards capitalising on its potential.