FoF pops up as workaround to Sebi’s AIF cap

Sebi’s investor cap aims to avert AIFs from becoming too large and resembling mass retail products like mutual funds

- Apoorva Ajith [e-mail]

India’s alternative investment funds (AIFs) are increasingly launching fund of funds (FoF) to work around the market regulator’s cap on the number of investors, which aims to prevent them from becoming too large and resembling mass retail products like mutual funds.

According to the Securities and Exchange Board of India (Sebi), no scheme of an AIF can have more than 1,000 investors, with an exception for angel funds. The cap has become more relevant as the industry grows rapidly and funds draw interest from a widening pool of high-net-worth individuals, family offices and global investors.

By placing investors in a FoF, that then allocates capital across underlying AIFs, managers can effectively broaden participation while staying within the letter of the rules.

“We have seen a gradual increase in FoFs in the industry as it helps an AIF accommodate investors who could not participate in a fund the first time around,” said Pratik Jain, managing partner-investments at Wealth Co. Asset Management Pvt. Ltd. “It is not unusual for a fund to be oversubscribed and reach the 1,000-investor limit.”