India’s AIF industry witnesses robust growth despite pandemic and it could just be the beginning

By Nikhil Kamath

The Alternative Investment Funds (AIF) industry in India has stood the test of time over the course of the last 9 years. Introduced in 2012 by the Securities Exchange Board of India (SEBI), the aim of the market regulator was to inject sophistication into the equity markets for investors having deep pockets and at the same time having a different set of objectives, as compared to an average Indian investor. Having said that, my reckoning is that the industry has a lot to catch-up with, when compared to its global peers.

Speaking about the pandemic, the Indian AIF space has displayed impressive resilience during the dramatic market crash, last year. In the Financial Year ending March 31, 2021, the investments in the Category-III bucket have grown by 3%, with the best performance of 9% in the last quarter. It goes without saying that the coronavirus pandemic crash has reinforced the need for capital protection amongst market participants. Volatility in markets and uncertainty in life is in general discouraging for the human psyche.

To look at this objectively, there are visible headwinds and tailwinds for the industry, going forward. Starting from the headwinds, one of the primary pain-points is the opaque fee structure from existing fund houses. The fee model is not client-aligned and is structured in a fashion that tends to eat into the compounding effect of investments made. Given the average ticket size an AIF vehicle commands, losing out on decent compounding is largely inefficient for an investor. Secondly, the cap on the maximum number of investors a fund can have is also something regulators must re-convene on. The idea is to have an all-inclusive framework in place that could act as a networking channel, at the very least.

From the perspective of the tailwinds, the first and foremost point is the growing need to employ sophisticated financial instruments that ensure efficient capital management and plausible risk management. We often relate the lack of depth in the Indian capital markets to ignorance en masse, but there are many participants who have dropped off after an unpleasant experience in the markets, and solely due to poor risk management. Also, AIFs can prove to be a great platform for investors with different backgrounds and profiles to come together and collaborate with one another in a strategic fashion. Lastly, the AIF structure in its true sense is the blueprint of dynamic asset management that exposes personnel to quality work. It is incredibly rewarding for young Indians to work at such setups and gain knowledge about the economy, markets, asset classes, and professional relationship building.

When one looks at the numbers, in terms of investment growth in the last 5 years, the Indian AIF space has grown by more than 850%. The graph above pictorially represents the journey of all three categories, across the same time. On a granular level, Category III has risen the most. In Q1FY17, Category III saw investments to the tune of 3,800 crores. This number was near about 42,000 crore, in the last quarter of FY21. The trend suggests that the Indian market participants are inkling towards structured products for their wealth management, which is a boon for our economy.

Having managed an asset management company for the last couple of years, the most important piece of encouragement is the growing awareness amongst investors on different nuances of the market and the economy. Gone are the days, when you would be invested in an asset and not have any background about it. The average investment growth over the span of the last five financial years is close to 13%. The number is encouraging but I am certain that the next five-six years will be path-breaking for the Indian AIF space. Both domestic and global investors have identified the preponderance of staying invested in Indian equities and this is perhaps one of the best ways to remain invested. However, with around 750+ registered AIFs in India, potential investors must always focus on quality and transparency. It’s a problem of abundance that we face and not a shortage, hence imperative to choose wisely.

(Nikhil Kamath is a Co-founder and CIO, True Beacon and Zerodha. Views expressed by the author are his own. Please consult your financial advisor before investing.)