Crossover Fund

Crossover funds are designed to give investors the opportunity to invest in private companies without having to be a qualified investor or an investor in a venture capital fund.
Crossover Fund
3 min
10-May-2024

A crossover fund is a type of mutual fund that allocates investments to both publicly traded and privately held companies. These funds offer investors the chance to participate in private company investments without the necessity of being qualified investors or involved in a venture capital fund. With the financial markets in India and across the world evolving rapidly, investors frequently have new avenues for wealth creation at their disposal. One such option is a crossover fund. This niche category of investments offers several unique benefits to investors. Read this article to find out what such funds are and if they may be suitable for your portfolio.

What is a crossover fund?

A crossover fund is a type of mutual fund that invests in a mix of two markets — namely the private equity and the public equity market. They offer investors the unique advantage of exposure to publicly traded companies and privately held entities via one single investment vehicle. These funds are named after the crossover offered between the two markets.

Investors who choose to invest in crossover funds can gain exposure to the private equity market even if they are not categorised as qualified investors or if they do not want to rely on venture capital funds. By allowing you to invest in both private and public companies through one channel, crossover funds make it easy to diversify your portfolio without complicating it.

Risk-reward proposition of crossover funds

Crossover funds have a different risk-reward proposition to offer than most other investment avenues in the equity market segment. Unlike other types of equity mutual funds, which are designed to offer relatively stable returns over the long term, crossover funds aim to give investors the twin advantages of high growth and high yield.

That said, the potential for high returns from a crossover fund is set off by disproportionately high risks. So, these funds are best suited for those with a long-term investment outlook. If you are a conservative investor or if you cannot afford to take on steep risks — either because you have other financial commitments or because you are close to retiring — crossover funds may be too risky for your portfolio.

Difference between public equity and private equity investments in crossover funds

To better understand crossover funds and crossover hedge funds, let us examine what public and private equity investments entail and how they are different.

You may already be familiar with public equity investments. These are the stocks of companies listed on the stock exchanges. Commonly available equity mutual funds invest in these publicly listed companies, so they are easily accessible to the average retail investor. Since these publicly traded stocks are regulated by the Securities and Exchange Board of India (SEBI) or equivalent regulator in global markets, they are relatively more stable and transparent than private equity holdings.

The stocks of privately held companies, unlike publicly listed entities, are not available to the public for trading. They are closely held by the promoters and founders of the private entity. Since these companies are not required to disclose their financials publicly, it may be difficult for the average investor to gain access to material information about such companies. Additionally, it is not easy for the typical retail investor to gain ownership in such privately held entities either.

Such investments are also highly risky because private companies may require a long time to become sufficiently profitable and gain enough liquidity to redeem your holdings. With a crossover fund, investors can read the fine line between the public and private equity markets and gain exposure to both kinds of companies.

How do Crossover funds generate returns?

The returns in a crossover fund are driven by two parallel goals — to benefit from the liquidity in publicly traded companies and to leverage the potential equity risk premium in privately held companies.

The equity risk premium refers to the additional or excess returns an investor expects from an asset in return for the higher levels of risk taken by investing in that asset. Since private equity is a high-risk asset, it is expected to carry a high equity risk premium as well.

That said, the potential for a high equity risk premium may or may not materialise. So, investors may be compensated for the additional risk taken if the private entities perform well over the long term. Otherwise, it may lead to significant losses.

Who should invest in a crossover fund?

Now that you know what crossover funds are, you need to analyse if such funds are suitable for your portfolio. If you are in a dilemma about this, here is a quick guide on the type of investors who may find crossover funds suitable.

A crossover fund may be ideal for investors who:

  • Seek diversified investments across private and public markets
  • Aim for growth potential in private companies and stability in public entities
  • Have a longer investment horizon to accommodate the illiquidity in private markets
  • Want exposure to companies at different stages of their business life cycle
  • Wish to benefit from the expertise of fund managers skilled in both market segments

Conclusion

While crossover funds offer many benefits, they are still in the nascent stages and are yet to gain popularity in the average retail investor segment. If you are not prepared for the high levels of risk involved in crossover investing, you can still achieve all your financial goals with a lumpsum investment or SIP investments in a conventional mix of mutual funds.

The Bajaj Finserv Mutual Funds Platform can help you here. With 1000+ mutual fund schemes available to choose from, you can find the right mix of funds to suit your investment horizon and risk tolerance on this one-stop platform.

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Disclaimer: 

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed.

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.

Frequently asked questions

Do crossover funds carry any risks?
Yes, the risks of investing in crossover funds include general market volatility in publicly held investments and liquidity constraints in privately held investments.
How are crossover funds managed?
Crossover funds are managed by investment firms that have specialised expertise in handling both private and public market investments.
Who is a crossover investor?
A crossover investor invests actively or passively in both public equity markets as well as private equity investments.
What are the benefits of crossover funds?
Crossover funds give investors the unique opportunity to invest in both private and public equity segments. This is particularly useful for investors because they gain exposure to private equity without being a qualified investor or an investor in a VC fund.
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