Professional Documents
Culture Documents
Venture Capital and Seed Funds
Venture Capital and Seed Funds
a) The foreign venture capital investor must disclose its investment strategy and life
cycle to SEBI, and it must achieve the investment conditions by the end of its life cycle.
b) At least 66.67 per cent of the investible funds must be invested in unlisted equity
shares or equity linked instruments.
c) Not more than 33.33 per cent of the investible funds may be invested by way of:
Subscription to initial public offer of a venture capital undertaking, whose shares are
proposed to be listed.
Advantages
• Easier for promoter than listing
• Protect investor from inefficient management
• Experienced leadership and advice
• Contribution to growth , reducing time lag between different stages of
production
Disadvantages
• Reduction in stake of founders
• Pressure to grow rapidly
• Under performers and loose their business
• Scarce and difficult to obtain
Hedge Funds
Dr. Manu Datta
Meaning
• A hedge fund typically is an investment product that is formed by
pooling investments from multiple investors. They are privately
pooled investment funds that earn high returns by investing in non-
traditional assets. In India, the categorization is under as Alternative
Investment Funds (AIF).
Strategies
• Taking advantage of corporate actions such as acquisitions
• Arbitrage
• Taking advantage of global market trends
Characteristics
• Minimum investment:
• The minimum investment is INR 1 crore. Only high net worth individuals (HNIs), banks, insurance companies,
and pension funds can invest in hedge funds. SEBI, like mutual fund investors, doesn’t protect hedge fund
investors.
• Fee Structures:
• The expense ratio for hedge funds can be around 2%. The managers also charge on the profits earned. The
performance fee is approximately 20%. The two-twenty rule of fee structures is followed globally but not
restricted to these numbers.
• Portfolio:
• Hedge funds have a diversified portfolio ranging from equities, bonds to derivatives, private equity fund,
currencies, and venture capital. It can invest in non-traditional asset classes and hence have a diversified
portfolio.
• Liquidity:
• Hedge funds have lock-in periods and are not highly liquid. The withdrawals can be monthly or quarterly.
Hence they aren’t highly liquid in comparison to other investment avenues.
Mutual funds:
• Don't take share from the profit
• Are available to the general public
• Charge a management fee (normally 1–2%)
• Generally don’t make high-risk investments
• Tend to perform worse than hedge funds
Hedge funds:
• Take ~20% performance fee from the profit
• Are available only to high-net-worth and
• Charge management fee (normally 2%) plus performance fee (normally 10–30%)
• Generally make high-risk investments
• Tend to perform better than mutual funds in terms of return
Continued
• Risks:
• They are prone to huge losses. Hedge funds, though manage risk, are considered high-risk investments due
to their aggressive nature. There is also an exposure to fund manager risks.
• Taxation:
• The taxation is heavy on Hedge funds in India. They come under the Category III of AIF, the tax rate is
42.74% on annual earnings over INR 5 crores.
• Absolute return products:
• There are no benchmarks for hedge funds to know their relative performance. Their performance is
independent and measured in absolute terms.
• Hedge fund manager:
• There can be multiple managers, and sometimes the manager might invest their own money in the fund. It
ensures safety for investors. The fund can be prone to the manager’s risk as well. Due to the inefficiency of
the manager, the fund’s performance can suffer.
• It was introduced in 2012 by Securities and Exchange Board of India
Advantages
• Diversification
• Managerial Expertise
• Personalized Portfolio
Disadvantages
• impossible for an average investor to invest.
• Liquidity Risk: These are long term investment instruments and have
lock-in periods. Therefore, these are not highly liquid investments.
• Less Regulation : Not strictly regulated by SEBI