Alternative Investment Funds, commonly known as AIFs, have become an increasingly popular investment option for investors looking beyond traditional mutual funds, stocks and fixed deposits. AIFs can provide access to investment opportunities across areas such as private companies, real estate, private credit, structured investments and other alternative assets.
However, choosing an AIF is very different from simply picking a mutual fund based on past returns. AIFs can have different investment strategies, fee structures, lock-in periods, risk levels and liquidity conditions. This makes it important to understand what you are investing in before committing your money.
So, how do you evaluate an AIF before investing?
Here are 10 important things every investor should check.
1. Understand the AIF’s Investment Strategy
The first thing to understand is where the AIF actually invests your money.
An AIF may invest in private equity, private credit, real estate, infrastructure, startups, listed securities or a combination of different assets. Two AIFs can both be called “alternative investments” while having completely different risk and return profiles.
Before investing, read the fund’s investment strategy in simple terms. Ask yourself what the fund is trying to achieve and how it plans to achieve it.
For example, an AIF investing in early-stage startups may have the potential for high returns, but it can also carry significant risk. A private credit fund may focus on generating income by lending to businesses, but the ability of borrowers to repay becomes an important consideration.
Do not invest simply because an AIF has generated attractive returns in the past. First understand the strategy behind those returns.
2. Check the Fund Manager’s Track Record
The person or team managing the AIF can have a major impact on its performance.
Look at the fund manager’s professional experience, investment background and experience in managing similar strategies. More importantly, try to understand whether the team has actually managed money through different market conditions.
A manager who has experience in the specific asset class can potentially understand its risks better than someone who has only recently entered the space.
It is also useful to check how long the investment team has worked together. A strong strategy can become difficult to execute if the key people managing the fund keep changing.
Past performance does not guarantee future returns, but the manager’s experience can still provide useful context when evaluating an AIF.
3. Look at the AIF’s Past Performance
Returns are naturally one of the first things investors look at. However, evaluating AIF performance requires more than checking one impressive number.
Look at performance over different periods and understand how the fund performed compared with its investment objective.
If possible, examine how the fund performed during difficult market conditions. A fund that generated strong returns during a rising market may not necessarily perform well when conditions become challenging.
You should also understand whether the reported returns are gross or net of fees and expenses. The return that matters to an investor is ultimately what remains after applicable costs.
Instead of asking only, “How much did this AIF make?”, ask, “How did it make that money, how consistently has it performed, and what risks were taken to generate those returns?”
4. Understand the Risk Involved
Every investment carries risk, but alternative investments can involve risks that investors may not be familiar with.
Depending on the strategy, an AIF may face market risk, credit risk, liquidity risk, concentration risk, interest-rate risk, business risk or valuation risk.
For example, if an AIF invests heavily in a small number of private companies, the performance of those investments can have a significant impact on the overall fund.
Similarly, a private credit AIF may face the risk that a borrower delays or fails to repay the loan.
Before investing, understand the biggest risks associated with the fund and ask whether you are financially comfortable taking them.
A higher potential return usually comes with a higher level of risk. The goal is not to find an investment with no risk, but to understand whether the risk is appropriate for you.
5. Check the Minimum Investment Amount
AIFs are generally designed for investors who can commit a significant amount of capital. This means the minimum investment requirement can be much higher than that of traditional investment products.
Before getting interested in an AIF, check the minimum amount required to invest.
More importantly, consider how much of your overall portfolio you would be putting into it.
An AIF may look attractive, but investing too much of your total wealth in a single alternative strategy can create concentration risk. The investment should fit into your broader portfolio rather than becoming your entire investment plan.
Think about the AIF as one part of your portfolio, not the portfolio itself.
6. Understand the Lock-In Period and Liquidity
Liquidity is one of the most important things to check before investing in an AIF.
Unlike investments that can be bought and sold relatively easily, some AIFs may require investors to stay invested for several years.
This is particularly important for funds investing in private companies, real estate or other assets that cannot be sold quickly.
Before investing, understand how long your money could remain locked in. Also check whether there are provisions for early withdrawal and whether exiting early involves additional costs or restrictions.
Ask yourself a simple question: “Will I need this money during the investment period?”
If the answer is yes, a less liquid investment may not be suitable for that portion of your money.
7. Study the Fee Structure Carefully
Fees can have a meaningful impact on the returns you eventually receive.
Do not look only at the headline management fee. Understand the complete fee structure, including management fees, performance fees, carried interest, setup charges, administrative expenses and any other applicable costs.
Performance-linked fees are particularly important because they may allow the fund manager to receive a portion of profits generated by the fund.
The key question is not whether an AIF has fees. Every professionally managed investment can involve costs. The important question is whether you understand what you are paying and whether the potential value of the strategy justifies those costs.
Always compare the expected returns with the total costs involved.
8. Understand Where the AIF Gets Its Valuations From
Valuation can be more complicated for AIFs that invest in assets that are not traded regularly.
For a listed stock, investors can generally see its market price. But how do you determine the value of a private company, an unlisted investment or another less frequently traded asset?
This is why investors should understand how the AIF values its investments.
Check how often the portfolio is valued, who is responsible for the valuation and whether independent valuation processes are involved where applicable.
You should also understand that a reported valuation does not necessarily mean that an asset can immediately be sold at that exact price.
This is especially important when evaluating funds that invest in private or illiquid assets.
9. Read the Fund Documents Before Investing
This may not be the most exciting part of investing, but it is one of the most important.
Before committing money, go through the relevant fund documents and understand the terms of the investment.
Look for information about the fund’s strategy, investment restrictions, fees, expenses, risks, lock-in period, exit provisions, distribution structure and other important conditions.
Do not rely entirely on a presentation or sales discussion.
If there is something you do not understand, ask the fund representative or a qualified financial professional to explain it.
A good investment decision should not depend on the investor understanding every technical term. But the investor should understand the important terms that can affect their money.
10. Check How the AIF Fits Into Your Overall Portfolio
Finally, do not evaluate an AIF in isolation.
The right question is not simply, “Is this a good AIF?”
The better question is, “Does this AIF make sense for my overall financial situation and portfolio?”
For example, an investor who already has significant exposure to equities may want to understand whether adding a particular AIF provides genuine diversification or simply adds more exposure to similar risks.
Similarly, an investor with most of their money in illiquid assets should think carefully before adding another investment that could remain locked in for several years.
Consider your investment goals, time horizon, liquidity needs, risk tolerance and existing portfolio before making a decision.
Questions to Ask Before Investing in an AIF
Before investing, it can help to have a simple checklist ready.
Ask:
- What does the AIF invest in?
- What is the investment strategy?
- Who manages the fund?
- What experience does the investment team have?
- How has the fund performed historically?
- What are the biggest risks?
- What is the minimum investment?
- How long could my money remain invested?
- What fees and expenses will I pay?
- How are the underlying investments valued?
- How can I exit the investment?
- How does this AIF fit into my existing portfolio?
If you cannot get clear answers to these questions, take the time to understand them before investing.
Final Thoughts
Evaluating an AIF is not simply about finding the fund with the highest historical return. Alternative investments can offer access to opportunities that may not be available through traditional investment products, but they can also involve higher complexity, lower liquidity and different types of risk.
A good evaluation starts with understanding the strategy. From there, investors should examine the fund manager, historical performance, risks, fees, liquidity, valuations and investment terms.
Most importantly, an AIF should be evaluated in the context of your own financial goals and existing portfolio.
The best investment decision is not necessarily the one promising the highest return. It is the one where you understand what you are investing in, what you could potentially gain, what you could potentially lose and how the investment fits into your larger financial plan.
Before investing in any AIF, make sure you read the relevant fund documents and consider seeking advice from a SEBI-registered investment adviser if you need help evaluating whether the investment is suitable for you.
