Green Tree Distribution recommends investments after discussions with a mutual fund distributor or a Certified Investment advisor

Green Tree Distribution recommend investments in AIF / Pre - IPO / PMS only after significant investing experience.

 

What is an Alternative Investment Fund (AIF)?

Alternative Investment Fund comprises pooled investment funds which invest in venture capital, private equity, hedge funds, managed futures, etc. In simpler terms, an AIF refers to an investment which differs from conventional investment avenues such as stocks, debt securities, etc.

Alternative Investment Fund is described under Regulation 2(1)(b) of the Regulation Act, 2012 of Securities and Exchange Board of India (SEBI). AIF can be established in the form of a company or a corporate body or a trust or a  Limited Liability Partnership (LLP).

Generally, high net worth individuals and institutions invest in Alternative Investment Funds as it requires a high investment amount, unlike Mutual Funds.

 

According to the Securities and Exchange Board of India (SEBI), AIFs are classified into three broad categories:

1. Category I comprises the following funds:

Venture Capital Fund (VCF)

Venture Capital Funds invests in StartUps which have high growth potential but facing investment crunch in the initial phase and need funding to establish or expand their business.  Since it is difficult for new businesses and entrepreneurs to raise funding through the capital markets Venture Capital Funds become the most sought after solution for their financing needs.

High Net Worth Investors (HNIs) who seek high risk-high return investments options prefer to invest in VCFs. After the inclusion of VCFs in AIFs, HNIs from abroad are also able to invest in VCFs and contribute to the growth of the economy.

Infrastructure Fund(IF)

The fund invests for the development of public assets such as road and rail infrastructure, airports, communication assets etc. Investors who are bullish on the infra development in the coming times can invest in the fund since the infrastructure sector has high barriers to entry and relatively low competition.

Angel Fund

This fund is a type of Venture Capital fund where fund managers pool money from numerous “angel” investors and invest in budding startups for their development. As and when the new businesses become lucrative, investors get the dividends.

In the case of Angel Funds, units are issued to the angel investors. An “angel investor” refers to an individual who wants to invest in an angel fund and brings in business management experience, thus guiding the startup in the right direction. These investors typically invest in firms which are generally not funded by established venture capital funds because of their growth uncertainty.

Social Venture Fund

Socially responsible investing has led to the emergence of Social Venture Fund (SVF) that typically invests in companies that have a strong social conscience and aim to bring a real change in the society.

These companies focus on making profits and solve environmental as well as social issues simultaneously. Even though it is a kind of philanthropic investment, one can still expect returns because the firms would still make profits.

2. Category II: Funds

 

investing in various equity securities and debt securities come under this category. All those funds that are not described under category I and III by SEBI, fall under category II. No incentive or concession is given by the government on investment in these funds.

Category II comprises the following funds:

Private Equity (PE) Fund

PE  funds basically invest in unlisted private companies and take a share of their ownership. Since unlisted private companies can not tap capital through the issuance of equity or debt instrument,  they look out for PE funds.

Further, these companies present its investors a diversified portfolio of equities which essentially, lowers the risk to the investor. A PE fund typically has a fixed investment horizon ranging from 4 to 7 years. After 7 years, the firm expects that it would be able to exit the investment with a good amount of profit.

Debt Fund

This fund primarily invests in debt instruments of listed as well as unlisted companies.

Companies that have low credit score generally release high yield debt securities accompanies with high risk. So companies with high growth potential, good corporate practices but facing capital crunch can be a good investment option for debt fund investors.

Fund of Funds

As the name suggests, this fund is a combination of various Alternative Investment Funds. The investment strategy of the fund is to invest in a portfolio of other AIFs rather than making its own portfolio or deciding what specific sector to invest in. However, it should be kept in mind that Fund of Funds under AIFs cannot issue units of fund publicly, unlike Fund of Funds under Mutual Funds.

3. Category III: Funds

 

These funds are those which aim at short term returns fall under this category. They employ various complex and diverse trading strategies to achieve their goal of short term capital appreciation. There is no specific incentive or concession given by the government on investment on these funds as well.

Category III comprises the following funds:

Hedge Fund

A hedge fund pools capital from institutional and accredited investors and invests in domestic as well as international markets to generate high returns. They take up leverage to a great extent and have aggressive management of their investment portfolio. Hedge funds are relatively less regulated as compared to its counterparts such as mutual funds and other investment vehicles.

However, they are expensive relative to other financial investment instruments. Hedge Funds generally charge 2% as the asset management fee and take up 20% of the profits earned as a fee.

Private Investment in Public Equity Fund (PIPE)

It is a privately managed pool of privately sourced funds earmarked for public equity investments. Private investment in public equity refers to buying shares of publicly traded stock at a discounted price. This enables the investor to purchase a stake in the company, while the company selling the stake receives capital infusion to grow its business.

 

Q. Who should you invest in an AIF?

A. High Net Worth Individuals (HNIs) who’re looking to expand their investment portfolio can consider investing in AIFs, as the return potential is very high, accompanied with an equivalent amount of risk. AIFs invest in securities that go beyond the traditional investments such as stocks, bonds, mutual funds, etc., paving a way for investors to expose themselves to alternative securities that deliver higher returns.

Q. Who is eligible to invest in AIF?

A. Any sophisticated investor whether Indian, foreign or non-resident Indian is allowed to invest in an AIF, provided s/he has the required funds for investment, and is willing to bet on the unlisted and illiquid securities.

Q. What is the minimum investment amount required to invest in an AIF?

A. All the categories of AIFs in India except angel fund require a minimum investment of Rs. 1 crore. For the angel fund, the amount is Rs. 25 lakh.

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Portfolio Management Services (PMS)

 

A service offered by the Portfolio Manager, is an investment portfolio in stocks, fixed income, debt, cash, structured products and other individual securities, managed by a professional money manager that can potentially be tailored to meet specific investment objectives. When you invest in PMS, you own individual securities unlike a mutual fund investor, who owns units of the fund. You have the freedom and flexibility to tailor your portfolio to address personal preferences and financial goals. Although portfolio managers may oversee hundreds of portfolios, your account may be unique.

These are of the following types :

Discretionary:

Under these services, the choice as well as the timings of the investment decisions rest solely with the Portfolio Manager.

Non Discretionary :

Under these services, the portfolio manager only suggests the investment ideas. The choice as well as the timings of the investment decisions rest solely with the Investor. However the execution of trade is done by the portfolio manager.

Advisory :

Under these services, the portfolio manager only suggests the investment ideas. The choice as well as the execution of the investment decisions rest solely with the Investor. Note: In India majority of Portfolio Managers offer Discretionary Services.

The Investment solutions provided by PMS cater to a niche segment of clients. The clients can be Individuals or Institutions entities with high net worth.

The offerings are usually ideal for investors who are looking to invest in asset classes like equity, fixed income, structured products etc ,who desire personalised investment solutions ,who desire long-term wealth creation ,who appreciate a high level of service.

 

 

Apart from cash, the client can also hand over an existing portfolio of stocks, bonds or mutual funds to a Portfolio Manager that could be revamped to suit his profile. However the Portfolio Manager may at his own sole discretion sell the said existing securities in favour of fresh investments

 

The tax liability of a PMS investor would remain the same as if the investor is accessing the capital market directly. However, the investor should consult his tax advisor for the same. The Portfolio Manager ideally provides audited statement of accounts at the end of the financial year to aid the investor in assessing his/ her tax liabilities.

 

 

Advantages of PMS :

Professional Management:

The service provides professional management of portfolios with the objective of delivering consistent long-term performance while controlling risk.

Continuous Monitoring :

It is important to recognise that portfolios need to be constantly monitored and periodic changes made to optimise the results.

Risk Control :

A research team responsible for establishing the client's investment strategy and providing the PMS provider real time information to support it, backs any firm's portfolio managers.

Hassle Free Operation :

Portfolio Management Service provider gives the client a customised service. The company takes care of all the administrative aspects of the client's portfolio with a periodic reporting (usually daily) on the overall status of the portfolio and performance.

Flexibility :

The Portfolio Manager has fair amount of flexibility in terms of holding cash (can go up to 100% also depending on the market conditions). He can create a reasonable concentration in the investor portfolios by investing disproportionate amounts in favour of compelling opportunities.

Transparency :

PMS provide comprehensive communications and performance reporting. Investors will get regular statements and updates from the firm. Web-enabled access will ensure that client is just a click away from all information relating to his investment. Your account statements will give you a complete picture of which individual securities you hold, as well as the number of shares you own. It will also usually provide:

the current value of the securities you own;
the cost basis of each security;
details of account activity (such as purchases, sales and dividends paid out or reinvested);
your portfolio's asset allocation;
your portfolio's performance in comparison to a benchmark;
market commentary from your Portfolio Manager

Customised Advice :

PMS give select clients the benefit of tailor made investment advice designed to achieve his financial objectives. It can be structured to automatically exclude investments you may own in another account or investments you would prefer not to own. For example, if you are a long-term employee in a company and you have acquired concentrated stock positions over the years and have become over exposed to few company's stock, a separately managed account provides you with the ability to exclude that stock from your portfolio.

Individuals and Non-Individuals such as HUFs, partnerships firms, sole proprietorship firms and Body Corporate can Invest in a PMS.

 

 

All investments involve a certain amount of risk, including the possible erosion of the principal amount invested, which varies depending on the security selected. For example, investments in small and mid-sized companies tend to involve more risk than investments in larger companies.

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Pre IPO Investing :

 

Many young companies grow much faster than mature companies due to their lower base hence they tend to significantly outperform the benchmark returns. However, a lot of this growth happens before the company goes public with an IPO. Hence participating in such companies in the Growth / Pre IPO stage can provide superior returns to the investor. Buyers need a safe mechanism that gives them access to high quality shares at the best price, provides matching of trade and enables even retail purchases.

Liquidity is one of the key challenges for shareholders of unlisted / Pre IPO shares. An employee holding ESOPs or an investor with a diversified portfolio may want to sell their unlisted / Pre IPO shares to generate cash or to simply book profits. Sellers need a safe mechanism that provides them the best price for their shares, matching of trade and enables even retail trades.

While investments in Unlisted/Pre IPO shares have the potential of giving high returns, they are also accompanied by higher risk due to a variety of reasons. Investors need to exercise caution while investing in Unlisted/Pre IPO companies. Generally, they should have a minimum time horizon of 4 years and should not allocate more than 30% of their portfolio in Unlisted/Pre IPO shares*.

Many young companies grow much faster than mature companies due to their lower base hence they tend to significantly outperform the benchmark returns. However, a lot of this growth happens before the company goes public with an IPO. Hence participating in such companies in the Growth / Pre IPO stage can provide superior returns to the investor.

  1. Are unlisted shares in Physical form or Demat form?
Ans: Unlisted shares can be in either Physical for or Demat form. Demat shares are easier and safer.

 

  2. Do I need a trading account and Demat Account to buy Unlisted Shares?
Ans: Only a Demat account (NSDL or CDSL) is required.

 

  3. Is Securities Transaction Tax charged on transactions in Unlisted Shares?
Ans: No.

 

  4. What is the capital gains tax treatment of investing in unlisted shares?
Ans: Yes,Short Term Capital Gains are taxed at the respective income slab of the assesse.
Short Term Capital Gains
Long Term Capital Gains are taxed at 20% plus cess with Indexation.

 

  5. Is there any Locking period, if yes, for how long?
Ans: No, unless the company floats an IPO.

If the company goes for an IPO, there entire Pre-IPO capital is locked in for a period of 1 year in accordance with SEBI’s Investor Protection guidelines.