Mutual Funds vs. Alternative Investment Funds: Know the Differences

In the vast landscape of investment opportunities, Mutual Funds and Alternative Investment Funds (AIFs) stand out as popular choices for investors seeking to multiply their wealth. While both offer avenues for diversification and potential returns, they differ significantly in their structure, strategies, and regulatory frameworks. Understanding these differences is crucial for making informed investment decisions.

In this blog, we will explore the differences between Mutual Funds and Alternative Investment Funds, examining their features, tax implications, and considerations for investors.

Alternative Investment Funds: An Overview

Alternative Investment Funds (AIFs) represent a diverse category of investment vehicles that deviate from traditional asset classes like stocks and bonds. These funds encompass a broad range of assets, including private equity, hedge funds, real estate, commodities, and more. In a sense, AIFs are privately pooled investment vehicles that collect funds from sophisticated investors.

AIFs are known for their flexibility in investment strategies and structures, often employing complex techniques to generate alpha and mitigate risk. Is a mutual fund an alternative investment? No, a mutual fund is not typically considered an alternative investment. Let’s take a closer look at what mutual funds are.

Mutual Funds: An Overview

A mutual fund is an investment fund that pools money from many investors to purchase securities. Mutual funds are often classified by their principal investments: money market funds, bond or fixed income funds, stock or equity funds, or hybrid funds. Funds may also be categorized as index funds, which are passively managed funds that track the performance of an index, such as a stock market index or bond market index, or actively managed funds, which seek to outperform stock market indices but generally charge higher fees.

Key Differences between Mutual Funds & Alternative Investment Funds

Understanding the differences between these investment vehicles, including minimum investment amounts, volatility, lock-in periods, and tax implications, is essential for making informed investment choices. By aligning investment decisions with their risk appetite, objectives, and time horizon, investors can navigate the investment landscape with confidence and achieve long-term financial success.

1. Minimum Investment Amount:

Mutual Funds generally have lower minimum investment requirements compared to AIFs, making them more accessible to retail investors. AIFs often require higher initial investments due to their specialized nature and complex investment strategies. With AIFs, the SEBI-mandated minimum investment amount is INR 1 crore. Mutual funds in India are required to give a minimum investment value of Rs. 100 for lump-sum deposits and Rs. 500 for Systematic Investment Plans (SIPs) as per the Securities and Exchange Board of India (SEBI) guidelines.

2. Volatility:

Mutual Funds tend to have lower volatility compared to AIFs, primarily due to their focus on traditional asset classes and diversified portfolios. AIFs, with their exposure to alternative assets and strategies, may exhibit higher levels of volatility and risk.

3. Lock-in Period for Redemption:

Certain categories of Mutual funds offer liquidity without having any hard lock-in, allowing investors to buy or sell their units at the prevailing Net Asset Value (NAV) on any business day. AIFs typically have lock-in periods where investors are restricted from redeeming their investments for a specified period, which can vary depending on the fund's strategy and regulatory requirements. Some AIFs may offer periodic redemption windows instead of daily liquidity.

4. Investor Eligibility:

Mutual funds are open to retail investors, institutional investors, and high-net-worth individuals (HNIs). AIFs typically cater to accredited investors, such as institutional investors, HNIs, ultra-high-net-worth individuals (UHNIs), or qualified institutional buyers (QIBs). They may have higher minimum investment requirements and are subject to stricter eligibility criteria.

5. Fee Structures:

Mutual funds typically charge management fees, which are a percentage of the assets under management (AUM) and may also include other expenses like administrative fees and distribution charges. AIFs often have performance-based fee structures, such as a management fee and a performance fee (also known as a "carried interest"), where the manager receives a percentage of profits above a specified hurdle rate. Additionally, AIFs may charge upfront fees, annual fees, or exit fees depending on the fund's structure and strategy.

How Are They Taxed?

Tax treatment varies between Mutual Funds and AIFs, depending on factors such as investment duration, asset class, and investor's tax status. In general, Mutual Funds may be subject to capital gains tax on profits realized from the sale of fund units, while AIFs may have different tax implications based on their underlying assets and investment structure, refer to the blog to
understand the taxation of AIFs in India.

What Should You Choose?

The choice between Mutual Funds and Alternative Investment Funds depends on various factors, including risk tolerance, investment objectives, liquidity needs, and time horizon. Investors seeking simplicity and comparatively lower risk may prefer Mutual Funds, while those willing to diversify assets into different asset classes despite the higher risks and potentially higher returns may opt for AIFs. It is, however, crucial to conduct thorough due diligence and seek expert advice before making any investment decisions.

Alchemy Capital Management is one of the leading providers of bespoke Portfolio Management Services in India. With a legacy of over 22 years, we have built a reputation for trust, integrity, and expertise. We cater to high-net-worth individuals, family offices, and institutions. Managing and advising an AUM of over USD 1.2 billion, as of April 30, 2024.

Here is a glimpse into our Category III AIF offerings:

1. Alchemy Leaders of Tomorrow:
Alchemy Leaders of Tomorrow aims to generate long-term absolute returns on the investor’s capital and does not aim to be benchmarked to any index by investing in such opportunities including investing in (i) Listed Indian equities, (ii) Private Investment in Public Equity (“PIPES”) on listed Indian equities, and (iii) IPO and pre-IPO opportunities. The Fund is market cap agnostic and may invest across the spectrum of large-cap, mid-cap, and small-cap stocks.

2. Alchemy Long Term Ventures Fund:
The investment objective of the Alchemy Long Term Ventures Fund (the Fund) will be to carry on the investment activity of a Category III AIF and aims to achieve long-term capital appreciation by primarily investing in equity and equity related instruments with small cap bias. The Fund will primarily focus on investments in small cap companies with up to 50% (Fifty Percent) or such other higher percentage as may be decided by the Investment Manager in accordance with Applicable Laws.

Connect with us to learn more about our offerings.

Disclaimer:
This blog is for informational purposes only and should not be considered as an offer or solicitation to buy or sell any securities or make any investments. We recommend readers to take independent advice before taking any investment decisions. Please refer to our Disclaimer and Disclosures for more details.