A lot of alternative investment funds that operate and are located outside India require a very low entry capital – $1,000 or less.
Setting an entry-level price so low is a strategy for luring retail investors who often don’t do their research and assessment.
Typically, a Hedge Fund is only allowed to take money from institutional investors or High-Net-Worth individuals. We are talking about $1,000,000 or more.
However, certain rules and regulations don’t apply to AIFs, which allow them to take money from anyone.
There are some pros and cons of these AIFs.
Pros are – you might get an equity-beating return in the long run.
Cons are – your chances of losing money are much higher. You have no control over the assets. You pay a lot of fees (20% is a lot).
Should you invest in these AIFs?
Understand three critical points about typical alternative investment funds. Primarily while investing in one located and operating outside India.
- Highly illiquid
- Consider mutual funds as bonds compared to AIFs – that risky
- Very complex, expensive to get in and out, and high fees
This is the scene for Alternative Investment Funds available for Indians.
However, this changes dramatically in the U.S.
AIFs are a great way to diversify, and people often invest in these funds to generate passive income, save tax and opt for safe yields, compared to the stock market.
This isn’t the case in India. It’s all about investing in risky assets and taking short to mid-term bets on trendy assets.
So make no mistake about it – AIFs for any average Joe in India is a way to lose money. Probably more than what you’d lose in the stock market.
There are a couple of AIF hedge funds that allow $1,000 investment. But are you sure this is the best thing you can invest in with $1,000?
One of the principles I live by is this:
Before deploying your capital to buy an asset, ask yourself – Is this asset the best my money can buy right now?
If the answer is yes, go for it.
If it’s a no, you need to find something better. It’s perfectly fine to sit on cash until you get to that point.
To give you a little context,
I haven’t increased my positions in any stock since February 2021. The only time I did, I bought Sona Comstar for under 490. I assess my money now can’t buy anything worth holding onto for the next five years. I’ll have to be anxious, check my holding every week or so, and it’s something I do not wish to do.
I’m sitting on cash for as long as I can’t increase my posting at valuations that make sense. I certainly can’t enter Infosys at 730, but 1450 would make a lot of sense.
Let me know what you think about investing in AIFs in or outside India.