India's strong economic growth, stable regulations, and large domestic market make it an attractive investment destination with diverse options. Among them, Alternative investments in India are especially compelling. Data shows that the Indian alternative investment industry (PMS & AIFs) has witnessed a compound annual growth rate (CAGR) of 27% over the past five years (FY19 to FY24).

Despite global uncertainties, India shines as a beacon of investment potential across asset classes. Several factors contribute to this: healthy government incentives, a vibrant domestic market, stable regulations, favourable demographics, a rise in income levels and a strong focus on infrastructure development. Together, these elements fuel one of the highest GDP growth rates (6.7-7%) among developing nations.

The stability of the Indian economy opens doors to diverse investment opportunities, from equities and bonds to REITs, PMS, AIFs, commodities, and more. Recognising this potential, several multilateral institutions and global banks including IMF, and S & P Global Ratings have recently revised their growth projections for India upwards. The latest revision of India’s growth estimates comes from India Ratings and Research. The agency has revised the country’s GDP growth estimate for FY24 to 6.7% from 6.2% earlier. The revision comes on the heels of the Reserve Bank of India upping its GDP growth forecast for 2023-24 by 50 basis points to 7%, from 6.5% earlier.

Given this promising outlook, considering alternative investments in India becomes especially compelling. Data shows that the Indian alternative investment industry (PMS & AIFs) has witnessed a compound annual growth rate (CAGR) of 27% over the past five years (FY19 to FY24).

With India’s ambitious target of becoming a $10 trillion economy by 2035, alternative investments offer exciting opportunities for growth and wealth creation.

Alternative investments: A compelling choice

The Indian alternative investment industry is booming, driven by strong economic growth and a growing appetite for sophisticated investment options among HNIs and UHNIs.

Over the past five years, Alternative Investment Funds (AIFs) have grown an impressive 34% CAGR, with their assets under management (AUM) reaching a staggering Rs 9.54 lakh crore as of Sep 2023. This stellar growth is primarily fuelled by the rising popularity of Category II AIFs, which include private equity, real estate funds, venture capital, venture debt, infrastructure funds and more. HNIs and UHNIs, with their rising wealth, have fuelled this trend, propelling Category II AIF commitments a staggering sixfold from Rs 1.45 lakh crore in 2018 to Rs 7.82 lakh crore in 2023, despite a minimum investment requirement of Rs 1 crore.

Meanwhile, the Portfolio Management Service (PMS) industry exhibits a steady growth trajectory. AUM managed by PMS providers has jumped at a 19% CAGR over the past five years, reaching Rs 6.19 lakh crore (as of December 2023).

This sustained growth speaks volumes about investors’ interest in PMS despite the regulatory change mandating a higher minimum investment requirement amount of Rs 50 lakh versus Rs 25 lakh earlier.

In terms of returns, within the PMS Bazaar universe, PMS approaches have delivered a remarkable performance. About 86% of the PMS approaches outperformed benchmark returns in the past year, based on December 31 data, which is essentially every 9 in 10 PMS approaches. Similarly, in the long run (10 years), 77% of the PMS approaches have outperformed benchmark returns.

Source: SEBI

Why a positive outlook?

Looking ahead, both PMS and AIFs are poised for continued rapid expansion. This optimism stems from India’s strong macroeconomic tailwinds and rising prosperity, factors that have been instrumental in their past success. The projected doubling of India’s HNI population by 2027, as per Knight Frank, further bolsters this outlook.

Recent regulatory changes are also playing a part in this narrative. Modifications in tax rules for debt mutual funds and insurance policies are likely to drive HNIs away from these options and towards the tax-efficient world of alternative investments.

Ultimately, it’s the heightened awareness among HNIs of the diversification and wealth creation potential offered by alternative investments that will solidify their long-term growth. As information about these alternatives becomes more readily available, along with the rising income levels and unique investment needs of HNIs and UHNIs, the demand for bespoke and structured PMS and AIF products is set to rise, pushing the industry to new heights.

What works in favour of India?

India’s economic growth narrative is optimistic with a GDP growth rate of 6.3% (average) annually, strong demographics, financial deepening, fiscal prudence, and healthy reforms underpinning India’s upward trajectory.

Demographic factor – A positive

At the core lies India’s demographic dividend. With a median age below 30, the nation boasts one of the world’s youngest and largest workforces. This translates to a readily available pool of skilled and cost-effective labour, a driver of robust domestic consumption and attracts foreign investments as well. Further, the sheer size of this young population leads to innovations in the economy, thereby ensuring continuous adaptability and resilience.

Financial deepening

Complementing this demographic benefit is a flourishing financial system. Credit penetration is steadily increasing, thereby unlocking previously dormant markets and encouraging the growth of small and medium-sized enterprises. This enhanced financial inclusion facilitates investment, fuels consumption, and adds capital into key sectors, leading to overall economic expansion.

Fiscal responsibility

Notably, India’s economic rise is not fuelled by reckless debt accumulation. Total corporate debt sits at a healthy 51-52% of GDP and according to a Nippon India Mutual Fund report India’s debt has remained constant since the global financial crisis of 2008 at nearly half of the global

level. The household debt, on the other hand, remains even lower at 20%, says the report. Thus, favourable demographics and low debt are key ingredients for a prolonged period of a virtuous cycle of consumption, incomes, savings and investments.

Healthy reforms and regulations

Beyond leveraging its strengths, India has actively fostered growth through economic reforms over the past 5-8 years. Streamlining bureaucracy, improving the ease of doing business, and implementing the Goods and Services Tax (GST) have all contributed to a more transparent and efficient economic environment. This momentum is further strengthened by a leap in the Ease of Doing Business ranking (World Bank), from 142nd in 2014 to 63rd in 2022. Initiatives like RERA (Real Estate Regulation Act) safeguard investors and curb project delays, PLI (Production Linked Incentive Scheme) boosts domestic manufacturing and job creation, and UPI (Unified Payment Interface) which enables real-time money transfers, particularly for MSMEs reducing the working capital burden, are fuelling this transformative journey.

In conclusion, India’s economic rise isn’t a flash in the pan but multiple internal and external factors such as receding inflationary pressures and stable crude oil prices, working in perfect sync for India, towards sustained economic growth and global leadership. While challenges remain, India’s economic engine should be able to overcome them and continue to roar on the global stage. In this context, the Indian alternative industry offers immense potential for growth to investors.