Syllabus :GS 3/Economy
In News
- The Reserve Bank of India (RBI) has issued new guidelines capping investments by Regulated Entities (REs) in Alternative Investment Fund (AIF) schemes.
Alternative Investment Fund (AIF)
- It is a privately pooled investment which collects money from investors and invests it in non-traditional asset classes.
- These Funds are ideal for High Net-worth Individuals (HNIs) because they need a high amount of investment.
- AIFs in India are controlled by SEBI.
Types of AIFs in India
- Category I – Investments in Startups & Social Ventures: These Funds invest in sectors that promote economic growth, job creation and social impact. The government encourages them by offering incentives.
- Category II – Private Equity & Debt Investments: The Funds invest mainly in private equity, debt securities or other assets for the furtherance of growth.
- While they do not directly benefit from government incentives, they are crucial in corporate finance since they invest in companies at various stages.
- Category III – High-Risk, High-Return Investments: These Funds use advanced trading strategies to maximise returns.
Taxation
- The Union Budget 2025-26 specified that income generated by Category I and II alternative investment funds (AIFs) will be treated as capital gains and taxed at 12.5%.
- Till now, there was no specific provision on how such income would be treated but now the definition of capital asset has been expanded to include gains made by the AIFs under the I-T Act.
| Recent Guidelines of RBI – No single RE can invest more than 10% of an AIF scheme’s corpus, and the collective investment by all REs cannot exceed 20%. – If an RE invests over 5% in an AIF that has downstream investments in the RE’s debtor company (excluding equity), the RE must make a 100% provision against its proportional exposure. – Investments in subordinated units require full deduction from the RE’s capital funds. – These norms will apply to commercial banks, cooperative banks, all Indian financial institutions, NBFCs and housing finance companies from 1 January 2026 or earlier. |
Benefits for Investing in AIFs
- The potential for higher returns compared to traditional mutual funds, though with increased risk.
- Diversified Portfolio: The ability to diversify across various asset classes like private equity, infrastructure, and real estate.
- Low Market Volatility : Lower exposure to stock market volatility, offering more stability during uncertain times.
Risks of Investing in AIFs
- High minimum investment requirements
- Limited liquidity due to lock-in periods preventing early withdrawals, and
- SEBI regulations may also impact Fund performance and investment choices.
Conclusion
- AIFs offer portfolio diversification beyond traditional options like mutual funds, stocks, and bonds, making them ideal for investors with substantial capital seeking unique opportunities.
- They are categorized into three types based on investment strategy, so it’s important to choose one that aligns with your goals.
- Before investing, understand the AIF’s category, risks, and tax implications to maximize returns.
Source :TH
