Post covid the investment pattern and investors both have changed dramatically. The financial advisory & wealth outfit knows the truth about this dramatic change. The knowledge level of the Indian investors has gone up significantly and the proof of the pudding is that today the Mutual Fund SIP book size on a monthly basis is Rs 12800 cr which used to be around Rs.3000 cr just 10 years before.
In the last 2 years from covid toll now the Indian market has added around 2.4cr + new Demat account holders which is itself a huge number if compared with the historic pattern of Demat accounts getting opened in the last 5 years.
Investors have become richer in terms of knowledge and also in monetary terms. If we look at the significant development in India we find that the pipeline of entrepreneurs can be understood best from the start-up ecosystem, which is the third largest in the world with more than 80,000 start-ups. It has been found to us that younger entrepreneurs enter the wagon of the rich and wealthy client segment. For instance, the youngest ten years ago was 37, last year was 23 and this year is 19.
The self-made billionaires are becoming faster as the landscape of investors has changed due to the startup eco-system where becoming rich and wealthy is much faster. This journey will continue and will go long way in the coming next 20 years or beyond. This new breed of investors has also become more passionate about exploring new forms of investments like unlisted shares, secondary bonds, bitcoin, PMS,, Alternative investment funds, etc.
The unlisted space and the secondary bond market have witnessed a revolution with this new breed of investors and wealth-rich clients breeding every year. AIFs Industry Size in India Investments raised by AIFs reached around USD 27.0 Bn by September 2020, posting a 74.4% CAGR between 2014-20. During this period, commitments for investments reached USD 55.5 Bn (65.5% CAGR) and investments by AIFs in alternative assets reached USD 22.7 Bn (75.2% CAGR).
If we look at the Alternative Investment Fund market we find that it has changed dramatically starting its journey from Rs.3 lakh cr to Rs.7.2 lakh cr in just 2 years. It is being found that by 2024 it will be 12 lakh cr industries and by 2025 it will overtake the Equity size of the Mutual Fund industry which currently stands at around 14.5 lakh cr. The wealth outfits, banks, and IFA segment know about the truth and validity of the above projections. Out of the 3 categories of AIF it is being found that category 3 long offers taxation benefit opportunities for investments has attracted investors to do investments of Rs 1 cr in the same.
If we look into the past performance of the Indian AIF industry we find shocking performance numbers. Category I funds outperformed the MSCI India Total Return Index by 19%, backed by strong venture capital returns. Category I funds of vintage 2016 were the best performing at 24.6% net internal rate of return (IRR). The benchmarks in the report comprise 296 schemes registered with the markets regulator Securities and Exchange Board of India (Sebi) across AIF Category I, II, and III, for performance data as of 31 March 2021.
The stupendous growth of the industry will be on two factors 1) Unlisted and 2) startup opportunities. Well-unlisted shares' astronomical gains made during the last 2 years of covid have made investors aware of the product. Now when Indian GDP is projected to grow at 7% and we have so many Unicorns coming up followed by quality IPOs then AIF has become the best route to explore all opportunities of the segment through categories 2 and 3. The maturity of the Industry has gone up significantly which has resulted in a demand surge in AIF category.
These two categories have played a big role in this growth of current size. Further AIF category 3 offers significant opportunities for doing combinations of unlisted and listed followed by anchor investment options in IPOs and making the product ready under the category of Rs 1cr for investors.
The confidence within the Indian economy and the opening up of further doors through PLI & 5G will play the dice behind the growth of the AIF industry in the coming years. We will witness one of the most significant revolutions in investment themes and products in AIF form.
If we look at the global size of the AIF industry we find that the AIF market reached USD 10.3 Tn in 2019 in the US expanding at a CAGR of 8.0% while in the EU the size of the AIF industry is (using data from the 30 members of the European Economic Area, EEA30) continued to expand to reach EUR 5.9tn in net asset value (NAV) at the end of 2021. In India, it is being found that Assets under management in AIFs have expanded by more than 70 percent in the previous 5 years compared to 14-16 percent for MF/PMS.
AIF basket works in an open architecture format. VC and PE-based AIFs will find huge demand as the Indian economy opens up the gate to the evolution of new industries and sectors. Do remember that AIF works in a theme-based process and hence this is the key grey area where investors want to be part of the product segment.
The growth of the industry is also due to significant returns being given by these AIF within a range of 25% to 40% IRR (excluding fund management fees and taxation). The way the Indian rich client count is going up the demand for these types of products will grow followed by returns and quality of products in AIF aligning with the 7% GDP growth of India.
Earlier only banks and wealth outfits used to sell AIFs and now IFAs have also joined and many traditional Mutual Fund players have joined the industry making the product reach every client who has an equity portfolio of more than 5cr. AIF has now become a product diversification for HNI and UHNI clients or even for those having 5cr of an equity portfolio. In the next article we will be coming up with the mistakes which we do in AIF investment and the Industry lacks a benchmark for measuring the overall AIF segment and solutions for the same.
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