- Fund of Funds for Startups (FFS), launched under Startup India initiative in 2016 by the Prime Minister, Shri Narendra Modi has committed Rs. 7,385 crore to 88 Alternative Investment Funds (AIFs) as of 24th September 2022.
- These AIFs in turn have invested Rs. 11,206 crore in 720 startups. FFS has been playing a monumental role in mobilizing domestic capital in Indian startup ecosystem.
- FFS was announced with a corpus of Rs. 10,000 crore.
- The corpus is to be built up over 14th and 15th Finance Commission Cycles (FY 2016-2020 and FY 2021-2025) through budgetary support by Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce & Industry, Government of India.
- Under FFS, support is extended to SEBI registered Alternative Investment Funds (AIFs), which in turn invest in startups.
- FFS has not only made capital available for startups at early stage, seed stage and growth stage but also played a catalytic role in terms of facilitating raising of domestic capital, reducing dependence on foreign capital and encouraging home grown and new venture capital funds.
- Collectively, the AIFs supported by FFS have a target corpus of over Rs. 48,000 crore.
- Among the prominent AIFs of leading startup investment firms supported under FFS are Chiratae Ventures, India Quotient, Blume Ventures, IvyCap, Waterbridge, Omnivore, Aavishkaar, JM Financial, Fireside Ventures, and more.
- The amount committed under FFS has seen a notable growth over the years recording a CAGR of over 21% in since the launch of the Scheme.
- Furthermore, Small Industries Development Bank of India (SIDBI) which is responsible for operationalising the Scheme has undertaken a series of reforms recently to expedite the drawdowns to enable AIFs assisted under FFS to avail accelerated drawdowns.
- This has created a positive impact and have resulted in year on year (Q1 FY 2021-22 vis-à-vis Q1 FY 2022-23) surge of 100% in the amount of drawdowns.
- FFS has helped anchor 67 AIFs out of 88 AIFs supported and 38 of these are first time fund managers which is line with FFS’s core objective of anchoring venture capital investments for Indian startups.
- Investments into eligible startups is approximately 3.7 times of FFS disbursements which is well above the minimum stipulated 2 times under the Scheme.
- Performing startups supported through FFS are showing valuation increase by more than 10 times with number of them even achieving unicorn status (valuation of over USD 1 billion).
- Dunzo, CureFit, FreshToHome, Jumbotail, Unacademy, Uniphore, Vogo, Zostel,Zetwerk etc., are some of the notable startups funded through FFS.
- The returns generated from the success of these startups and innovation created will remain within the country and facilitate generation of employment and creation of wealth
Alternative Investment Funds in India
- Alternative investment funds are alternate options for traditional investment (stocks, bonds, and cash).
- The alternative investment offers an 11-13% return to retail investors and these alternative investment funds in India offer returns that are way better than traditional investments.
- These are effective investment options that include a wide range of investment options and are not linked to the stock market or even the bond market.
- Investors can invest in alternative investment funds to diversify their investments. Also, it acts as an asset hedge.
- Investors who belong to HNI (high net worth individuals), family offices, and rich retirees use AIF funds to earn passive income and regular income.
- In this article, we are going to learn about what are alternative investment funds in India, the types of alternative investment funds in India.
Alternative Investment Funds
- Alternative investment funds refer to funds that include hedge funds, venture capital, private equity, angel funds, real estate, commodities, collectibles, structured products, etc.
- Alternative investment funds are an alternative to traditional investment options (stocks, bonds, and cash). investors can invest in AIF funds to diversify their investment and get benefits.
- Generally, investors having high net worth, retail investors, and individuals prefer to invest in AIF funds.
- However, they can not be bought and sold easily unlike conventional investments. The government is working to make these alternative investment funds a lot more transparent.
Top Alternative Investment Funds in India
Hedge funds: Hedge funds are the type of alternative investment funds that collect money from investors to invest in equity markets that are highly risky, international debt and domestic debt. Since, hedge funds adopt an aggressive investment strategy, offer high returns to investors. Hedge funds fund managers charge a high management fee of 2% and 20% of the total returns earned annually. Generally, accredited investors with high net worth prefer to invest in hedge funds.
Private Equity: Private equity funds invest in companies that are not listed on the public exchanges. Since private companies are not listed on public exchanges, they cannot raise capital from the public. So, they raise capital with the help of private equity funds. The investment period is considerably long. over the past 13 years, private equity funds have raised around $100 billion in India. Hence, they play an important role in the development of small and medium businesses.
Commodity: Commodities are oil, grain, agriculture products, energy, metals, etc. These can be bought and sold. Investing in Commodities is a great way to protect against inflation because commodities price increases along with other goods when inflation increases. However, commodities markets are driven by some macroeconomic factors and are susceptible to market instability. So, investors should consider these factors before investing in the commodity market.
Real estate: Traditionally, one can invest in real estate if they have a considerable amount of money ranging from a few lakhs to a few crores but with the advent of REITs (real estate investment trusts) investors can invest in real estate with as little as Rs. 5000 to Rs. 10000. Platforms like Strata, Prop share, etc allows investors to invest in real estate which includes commercial buildings and offices with a small amount of money. Investors can have fractional ownership in grade A properties such as commercial buildings or offices and warehouses. These properties have an existing tenant who pays rent every month which helps the owner of the property to receive regular cash flow. You can invest in real estate through REITs, real estate mutual funds, etc.
Venture capital: Venture capital funds are types of funds that invest in startup companies that are in their early stages and need capital to expand and develop their business. India is one of the largest startup ecosystems in the world after the US and China. Hence, new entrepreneurs can get capital from venture capital funds. Venture capital funds put their money into small businesses and startup companies based on their characteristics, product development stage, and asset size of the company. The main objective of venture capital is to help the business to scale and help in the growth of products or services. Investors can earn returns based on what businesses a venture capital fund has invested in.
Peer-to-peer lending: Traditionally, P2P lending was when Individuals deposit money in a bank to earn interest and the same deposited money is lent out to borrowers who will pay certain interest to the bank. The difference between the interest paid by the borrower and the interest earned by the depositors is kept with the bank. Banks have some terms and conditions such as who can borrow, how much one can borrow, and at what interest whereas Modern P2P lending does not include banks which means lenders and borrowers can earn more interest. There are many P2P lending platforms such as FAIRCENT, LENDBOX, LIQUID LOANS, etc that allow P2P lending. These platforms allow lenders to select their borrowers based on loan criteria, location, profile, reason for the loan, loan tenure, and rate of interest. Currently, they offer 18-22% net returns. However, P2P lending is associated with risk as there is always a chance of the borrower defaulting. So, investors should do their research before investing in it.
Angel funds: Angel funds are a type of alternative investment fund that pools money from a number of investors that are interested to invest in new businesses that are at the early stage. when the new businesses become profitable, investors receive dividends. Angel investors help businesses to grow and become profitable.
SOURCE: THE HINDU,THE ECONOMIC TIMES,MINT