Alternatives Gain Traction in India

Regulations, increasing wealth, and managers’ interest support the growth trend

April 2019, SINGAPORE - Alternative investment funds (AIFs) in India have grown significantly in the past few years, driven by regulatory reforms and the increasing number of high-net-worth individuals looking for sophisticated and niche strategies.

The number of AIFs registered with the Securities and Exchange Board of India (SEBI) grew to 541 as of March 2019, from 253 in June 2016. Between December 2015 and June 2018, total commitments made by investors in AIFs surged 485% to INR1.8 trillion (US$25.8 billion), and total investments made by AIFs increased 434% to reach INR748.9 billion.

Demand is driven by an increasing number of wealthy investors in India. AIFs provide sophisticated investors with diversification benefits and a wider range of investment options in unlisted securities, real estate, and commodities, compared to mutual funds.

Regulatory reforms have also boosted this sector. These include the regulation on tax pass-through status in 2015, the online filing system for AIFs introduced in 2017, and the rise in overseas investment limit for AIFs in July 2018.

Measures by the SEBI to reduce the costs of mutual fund investments for retail investors have also encouraged managers to promote AIFs, as they seek alternative sources of revenues. AIFs’ flexibility in charging fees makes these funds an attractive proposition for managers looking to boost their revenues.

Not surprisingly, the segment has witnessed an increase in new entrants. Franklin Templeton set up its AIF team and launched its first AIF in August 2018, while DHFL Pramerica Asset Management launched its first AIF last December. Apart from asset managers, firms such as alternative specialist Avendus Capital have made names for themselves in AIFs.

In line with findings from Cerulli Associate’s survey of asset managers in 2018, managers in India are interested in exploring long/short strategies to cater to investors’ needs for absolute returns, irrespective of market cycles and interest rate movements. Alternative asset managers are also eyeing opportunities in India’s real estate sector.

“Following the re-categorization of mutual fund schemes, asset managers have been exploring other avenues offering a greater scope of product innovation, compared to mutual funds. AIFs offer innovative and high-risk strategies, as their investment stipulations are less strict than those of mutual fund vehicles,” says Ayushi Bainwala, analyst at Cerulli. “The industry can expect an increasing number of alternative products and strategies to be launched in the near future.”


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