Creating a robust investment portfolio is all about the right balance of selecting the stocks or funds. This is where alternative investment funds add fuel to diversification, improve returns, and manage risk effectively alongside traditional assets. In this blog post, we will uncover how AIFs fit into a diversified portfolio and why PMS AIF WORLD makes investing easy and more effective.  

Understanding alternative investment funds (AIFs)

AIFs are a special group that raises money from experienced investors to invest in venture capital, real estate, and private equity, as they can face greater risk and invest substantial amounts. They are regulated by the Securities and Exchange Board of India (SEBI) and involve non-traditional illiquid investments that promise higher returns. In addition, they provide diversified opportunities beyond stocks and bonds, but are associated with some risks that are not found in traditional ones.

In India, AIFs are divided into three sections on the basis of their investment plan:

  1. Category I- invest in venture capital, angel fund, start-ups, and other businesses that have the potential to do well in the market.
  2. Category II- invest in private equity funds, credit funds, and debt funds.
  3. Category III- invest in Private Investment in Public Equity Fund (PIPE) and hedge funds.

Importance of diversification in today’s market

Diversification is very significant in today`s market due to the following focal points:

  1. Nowadays, markets are volatile, sophisticated, and influenced by geopolitical issues and inflation. Thus, investors need to diversify in nature.
  2. The traditional form of investments is not worthy of preserving capital all the time.
  3. Does not lead to the accumulation of risk in one asset class.
  4. Helps to decrease reliance on stock market returns only and promotes stability throughout the period.
  5. Encourages growth in new sectors and facilitates better risk management.

How AIFs bring exposure to a diversified portfolio

Evaluate the following points to know how AIFs play a significant role in diversifying portfolios.

  1. They help investors access opportunities that are not available through traditional mutual funds and markets.
  2. They do not invest in a single market but rather invest in various funds and markets, thereby maintaining stability.
  3. They uplift both beginners and advanced companies before coming to the limelight.
  4. They involve expert fund managers who conduct research and provide better exposure to investors.
  5. They can produce alpha or extra return, which is not dependent on NIFTY/Sensex trends.

Identifying the best AIF in India 2025

If you want to identify the best AIFs in India, explore the features below to keep in mind before choosing one.

  1. Choose the AIFs that have a strong record of good performance over the years.
  2. Invest in a fund managed by an experienced and proficient fund manager.
  3. Keep in mind to look into the transparency level of the AIFs and their funding plans.
  4. Note down the fee structures of the AIFs and compare them to determine the most suitable option. The one with high fees can affect your net return.
  5. Only choose those AIFs that are recognized by SEBI.

Risks and considerations before investing in AIFs 

Before investing in AIFs, investors should consider the inherent risks associated with these investments. Here is a compiled list of potential hazards that one can encounter.

  1. You cannot redeem your investment before maturity because category I and category II AIFs have an extensive lock-in period, typically ranging from 3 to 7 years or more. But in the case of category III AIF, it depends on the fund’s structure (open-ended or closed-ended) and terms and conditions outlined in the private placement memorandum. 
  2. Here, the minimum investment rate is high, which is Rs. 1 crore, making it ideal only for advanced-level investors.
  3. One cannot expect a return all the time. It depends on the types of funds. 
  4. There can be taxation that can change your outcome.
  5. Some AIFs focus on themes that have potential for high risk.
  6. The AIF must have a solid strategy and deep diligence.

Conclusion

A well-defined portfolio is not only about stocks and bonds, but also wisely blends traditional and other assets. AIF brings an additional layer of luxury, letting investors take a step forward into unique ideas and the private market. When chosen through a trusted platform like PMS AIF WORLD, AIFs can instantly improve portfolio performance, thereby balancing reward and risk to achieve long-term financial returns.