How AIFs Can Boost Portfolio Returns Beyond Mutual Funds

For decades, Retail and HNI investors relied on mutual funds for wealth creation. By pooling capital to invest in equities and fixed-income securities, mutual funds democratized the share market. However, as markets mature, most mutual funds deliver nearly the same returns; as a result, it's very difficult for fund managers to generate consistent alpha. In this situation, Alternative Investment Funds (AIFs) enter. Regulated by the Securities and Exchange Board of India (SEBI), they're a special class of investment for sophisticated investors. They seek greater returns than mutual funds do by venturing into private markets, complex trading, and investing in illiquid or unlisted shares. AIFs provide returns that mutual funds can’t match.

Mutual Funds 

Mutual funds are allowed only in the share market, secondary sales, and debt instruments. They can also participate in:  

• Equities & Debt - In the share market, mutual funds are known as long-term institutional investors and get returns ranging 15 to 20%. Mutual funds also invest in corporate debt and government bonds that give them 5-10% stable growth.

• Mainboard IPOs - As an anchor investor, they can participate in IPOs of companies that become established players in the industry. Mutual funds are prohibited from serving as anchor investors in Pre-IPOs and SME IPOs. 

Alternative Investment Funds (AIFs)

But on the other hand, Alternative Investment Funds (AIFs) offer greater concentration than their peers; they can invest in every possible asset class where mutual funds cannot, like 

• Startups - Nowadays, everyone is thinking of startups and also building one, but the problem with these companies is they don't have funds to grow. Here AIFs come into the picture, providing them the funding in return for equity and betting on their future for higher growth that no one matches. 

• Venture Debt - This segment provides higher returns as compared to corporate debt and bonds, usually 12 - 18%. These are the companies that don't issue bonds because they are not listed blue-chip companies, and banks avoid, they thinks its risky. But these companies have good financials and higher growth opportunities, so AIFs lend them.

• Real Estate AIFs - Generally, they lend capital to developers and often invest in commercial and residential projects that give them returns of 18 to 22%. This return can’t be match by traditional investments. 

• Pre-IPOs & SME - As an anchor investor, they can invest in this segment. And get higher returns than mutual funds, usually 40 to 50%. Because these are companies having low risk profile and profitable business, with funding they can grow faster and give returns that mainboard companies can't match. 

For example, Alpha AMC is a Category 1 AIF where it invests in Pre-IPOs and SME IPO that give 36 - 60% CAGR returns, but typical mutual funds give less than 20% CAGR returns.

AIFs tend to give higher returns because when mutual funds start investing, AIFs already make that company 100 from 0; they generally invest where they get the highest return.  

As the market becomes more efficient, it's difficult for traditional fund managers to outperform or generate alpha from the market. But for new streams like AIFs, they are designed to outperform every other asset class. For sophisticated investors and HNIs capable of managing the ₹1 Crore, AIFs are the only options, not just for greater returns but also for exclusive access to private equity, Pre-IPOs, and the booming Indian SME market. India is a country where we can see entrepreneurs in every city; for them, we need more AIFs because it fills the gap that the traditional class doesn’t.