Summary of this article
Consider 10-15% allocation to alternative investments
Understand risks before choosing an AIF
Daga advises investors not to chase returns
Alternative Investment Funds (AIFs) are increasingly finding a place in the portfolios of high-net-worth individuals (HNIs) and family offices. But as for the investors who are considering investing in their first AIF, the key question comes down to simply how much return the fund can generate, and whether the product fits their risk appetite, financial goals and liquidity needs. Daga advises that investors could consider allocating around 10 per cent to 15 per cent of their overall portfolio to alternatives. Meanwhile, they can keep the majority of their investments in conventional products such as mutual funds and fixed income instruments; however, an allocation like this should not be treated as a one-size-fits-all formula.
I would like to begin with your HNI clients. Investors want everything. Equity return, safety of debt, liquidity of mutual funds, and the excitement of cryptocurrency. So here I would like to ask you, does AIF tick all the right boxes here? If not, what extra AIF bring to the table or to the portfolio for investors?
So as you rightly said, it is very difficult to get the mix of everything where you can get the safety of a bank FD and get a 20 per cent return. It doesn't happen in the real world, actually; good to say. So AIFs offer different products in different buckets, as you mentioned, but each product has its own risk-reward, actually. I'm not saying that the return is given because risk doesn't come for free, actually. And my learning has been that the first, most important thing in any investing is how you address the risk and what your risk appetite is. As you can't predict the future, you can only prepare for it. Based on that, your returns would be given, and if you want to play in the 20 per cent bucket, you'll be in the highest bucket. If you want to play with a safe product, you will put it in a mutual fund at 8 per cent in an overnight liquid fund or a bank corporate debt fund. So there are different buckets, like in equity, when you do a large cap, mid cap, and small cap allocation, you do large cap because you want a very stable return, and you do a mid, small cap and micro cap because you want like an outsized return. Similarly, in AIF, you have various buckets; you pick and choose what you want to taste in, because getting everything in that same mix is not possible.
If you had to give a piece of advice to an investor considering AIF for the first time, what do you want them to understand before writing that cheque?
I think the most important thing in any investing, whether AIF or anything, is not to chase returns. Unfortunately, when I meet investors across India, I think the first thing is what the headline return of this scheme is. As I told you, returns come with risk; a more important point to note is that you should not chase returns. You should invest time in understanding the product much more, because if you do that, I think returns will follow. But if you try to chase returns without understanding the product, I think you are bound to lose money in the product; actually, that's given.
So basically, you mean to say that you need to take some extra risk, extra mind to understand it, to take extra returns while also understanding it better?
Like, if you want to buy a stock, how much time do you need to understand that the stock is not going to double, you are going to buy it tomorrow? You have to spend time understanding the stock. Similarly, in AIF, there are different buckets: you want to do credit, you want to do private equity, you want to do venture capital. Please understand the product because tomorrow, when the product guy sells you the product, it's your money on the line. You need to understand what risk you are taking, and I think once you have understood that thought process and if you choose the right product with a good kind of risk management, I think returns will follow. I think you can't underwrite or predict the future in any asset class in India. You have to do what you can do well in the present; put your time into that. As long as you're sorting that, I think the returns should be given because India is a growing country. In any asset class, if you have invested correctly, I think it should make money for you.
