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. For investors considering their first AIF, however, the key question is not just how much return the fund can generate, but whether the product fits their risk appetite, financial goals and liquidity needs.
Daga suggests that investors could consider allocating around 10% to 15% of their overall portfolio to alternative investments, while keeping the bulk of their money in conventional products such as mutual funds and fixed-income instruments. However, this allocation should not be treated as a one-size-fits-all formula. The appropriate allocation would depend on an investor’s individual financial circumstances, risk tolerance, investment horizon and liquidity requirements.
Investors today want it all—equity-like returns, the safety of debt, the liquidity of mutual funds, and even the excitement of cryptocurrencies. So, does an AIF really tick all these boxes? And if not, what does an AIF bring to the table that traditional investment products may not?
As you rightly said, it is very difficult to get a mix of everything—say, the safety of a bank FD along with a 20% return. That simply doesn’t happen in the real world.
AIFs offer different products across different buckets, as I mentioned, but each comes with its own risk-reward profile. I’m not saying that higher returns come without risk. Risk doesn’t come for free.
My learning has been that the first and most important thing in investing is to understand how you address risk and what your risk appetite is. You cannot predict the future; you can only prepare for it. Your potential returns will depend on the level of risk you are willing and able to take.
If you want to target the 20% return bucket, you are likely to be taking significantly higher risk. If you want a relatively safer product, you may consider options such as overnight or liquid funds or bank and corporate debt instruments, depending on your requirements.
It is similar to equity investing. You allocate to large-caps when you want greater stability, while mid- and small-caps are typically considered when you are looking for higher growth potential, with correspondingly higher risk.
Similarly, AIFs have various strategies and risk buckets. Investors need to pick and choose based on their objectives, risk appetite and investment horizon. You cannot expect to get everything in the same package.
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 investing—whether it’s an AIF or any other product—is not to chase returns. Unfortunately, when I meet investors across India, the first question I often hear is, “What is the headline return of this scheme?” As I said earlier, returns always come with risk. What is far more important is to spend time understanding the product—how it works, what the risks are, and whether it fits your investment objectives.
If you take the time to understand the product, returns may follow. But if you chase returns without understanding what you are investing in, you are taking a risk that can ultimately lead to losing money. That, unfortunately, is a very real possibility.
So, basically, are you saying that to earn potentially better returns from any investment product, investors should focus on understanding the product rather than simply chasing returns?
If you want to buy a stock, you cannot simply decide to buy it tomorrow without spending time understanding the company and the stock. You have to do your homework. The same principle applies to AIFs.
AIFs have different strategies and buckets—you may choose credit, private equity or venture capital, for instance. Investors need to understand what they are investing in because, ultimately, it is their money on the line. When someone sells you an investment product, you need to understand the risks you are taking.
Once you understand the product, choose a strategy that suits your objectives and are comfortable with its risks, and the fund has a sound risk-management framework, you are in a better position to pursue your return objectives.
I don’t think you can underwrite or predict the future with certainty in any asset class. What you can do is focus on what you can understand and assess today. Put your time and effort into that. If you get those things right, the investment has a better chance of delivering over the long term.
