5 Best Alternative Investments: Trends And Popular Options

Over the past few years, India's investment landscape has seen a considerable shift. It has been looking for new investment alternatives with better risk-reward. Some of these alternative investment options in India can offer high returns with low volatility and help diversify an investment portfolio.

Alternative investments like private equity, venture capital, and various debt instruments are India's fastest-growing (24% CAGR) segment, representing 12% of India's AUM¹. According to a report by 360 One, alternatives could constitute 20% of India's total AUM by 2026.

Conventionally, investing in such options was a preserve of big institutional investors. This is changing, and learning about such investments is more important than ever. 

This article gives an overview of various investment alternatives. You will also learn about the latest trends in this industry. 

Recent Alternative Investment Trends In India

• Fractional Ownership: The concept of fractional ownership is gaining limelight in India. It makes it easier for investors to participate in high-ticket-size investments. They can own a fraction of an asset like startup equity or real estate. As per a report by Knight Frank, India’s market size of fractional ownership (real estate) is expected to grow to $8.9 billion in 2025 at a CAGR of 10.5%².
• Regulated And Tech-Enabled Platforms: The rise of regulatory-compliant and tech-enabled platforms plays a significant role in democratising alternative investments. Previously, high-yielding options were only available to institutional investors but are now accessible to retail investors. These platforms have also helped in increasing investor awareness about the topic. 
• Increasing Demand For Diversification: Investors are increasingly looking to diversify their portfolios. This helps them to protect their investments from volatility. Additionally, they want to earn inflation-beating returns. Some alternative investments bridge this gap between volatility and returns due to their non-market-linked nature. Corporate bonds are another great option for investors seeking stability with predictable returns. With various ratings and tenures, they allow investors to choose based on their risk appetite. 

5 Best Alternative Investments Worth Exploring

1. Securitised Debt Instruments (SDIs)

SDIs are created by pooling several underlying assets into a listed fixed-income security. The underlying assets can be loans, lease agreements, invoices, etc. 

It is an emerging alternative fixed-income opportunity in India for retail investors. 

On Grip Invest, investors have many options based on this model, for example, LeaseX, LoanX, BondX, and InvoiceX. The main USP of these products is that they offer significantly higher returns than other similarly credit-rated fixed-income products. 

You can also read: 

Understanding Securitised Debt Instruments (SDIs): Definition, Investment Opportunities, Risks And Challenges 

Benefits Of SDIs 

• High, Fixed, Non-Market Linked Returns: The returns are fixed and not subject to market ups and downs. Investors can quickly generate up to 16% IRR by investing in SDI at Grip Invest. 
• Faster Principal Repayment: A part of the principal and interest is paid back to the investors as monthly/quarterly returns. This helps in reducing the risk and ensuring faster principal repayment.
• Easy Diversification: Investors can invest in a pool of underlying assets further diversified across categories. For example, a LoanX opportunity club brings together up to 10,000 loans.
• Security Cover: Most SDIs involve security measures such as over-collateralisation, cash collateral, EIS, etc., providing safeguards against credit defaults.

Limitations Of SDIs 

• Default Risk: Despite several security measures, there is a risk that the borrower will not pay back. 
• Non-liquid Nature: These investments are less liquid than stocks, mutual funds, etc. Investors may face a challenge in generating cash flow.
• Complex: The structure and workings of these products require time and knowledge to understand. However, some online investment discovery platforms, like Grip Invest, simplify the opportunities and carry out the due diligence for their investors.

2. Commercial Real Estate (CRE)

Commercial real estate has always been popular among investors. Due to the significant investment amount, it was traditionally considered the domain of high-net-worth individuals (HNIs). However, fractional ownership in the CRE space makes low-ticket-size investments accessible to individual investors.

Benefits Of CRE Investment 

• Passive Income Generation: Commercial real estate provides a higher rental yield than residential properties. It also has longer leases, which provides higher return predictability.
• Potential Of Value Appreciation: Commercial properties can appreciate over the long run. This can help generate significant gains over and above the rental income
• Strong Underlying Asset: Ownership of real estate continues to be one of the most secured asset classes, providing a high degree of comfort on capital protection.  

Limitations Of CRE Investment

• High Initial Investment: It requires significant upfront capital. However, it is now available at a much lower ticket size via the fractional ownership concept.
• Illiquidity: Selling commercial properties can be a challenge. It only sometimes results in quick liquidity. 
• Tenant Risk: There is a high dependence on tenants. It exposes investors to the risk of vacancies and payment default.  

3. Private Equity And Venture Capital

India has the world’s 3rd largest ecosystem for startups. The country has over 1,12,718 DPIIT-recognized startups across 763 districts³. 

The thriving startup ecosystem in India has driven the expansion of venture capital (VC) and private equity (PE) investments. VC and PE funds extend financial support to emerging companies in their early stages. They also support those startups experiencing rapid growth in exchange for ownership shares. 

Benefits Of Investing In PE/VC Funds

• Access To Innovation: VC investments give access to innovative startups and disruptive technologies. Investors can become a part of the growth story of many great ideas.
• High Return Potential: Investors can earn substantial returns by investing in worthy ideas and startups. These returns are usually higher than traditional asset classes. 
• Diversification: It allows diversification across various industries, stages of development, locations, etc. This can help reduce concentration risk. 

Limitations Of Investing In PE/VC Funds

• Illiquidity: Investors may be unable to sell their stakes in such companies quickly. Their investment can get tied up for an extended period.
• High Fees: PE and VC funds have high management and performance fees. This can reduce actual returns. 
• High Risk: Investing in startups carries a very significant risk. Many startups fail to achieve their growth targets. This may lead to losses for investors.

4. Peer-to-Peer Lending

P2P lending involves facilitating direct connections between borrowers and lenders via online platforms. This lending model allows individuals and small businesses to get easy loans. They do not need to rely on conventional financial intermediaries.  

Benefits Of P2P Lending

• Accessibility: Traditional banks may be unwilling to fund small businesses and individuals. P2P lending offers access to alternative sources of funding. 
• Quick Process: It allows borrowers to get funds more quickly when compared to traditional lending institutions. 
• High Returns: Lenders receive a higher interest rate on the loans they give when compared to conventional banks. 

Limitations Of P2P Lending

• Credit Risk: There is a high risk of default from borrowers. Lenders may lose their investment if the borrowers default on payment.
• Evolving Regulations: While regulated by RBI, P2P lending platforms have limited oversight and limited history. Such platforms are not heavily regulated like banks. This can lead to fraud or malpractice.
• Platform Risk: The credibility of P2P lending platforms can differ significantly. Some platforms lack risk management or transparency.

You can also read: 

P2P Lending Vs LoanX: Which Option Is Best For You?

5. Cryptocurrencies

In India, regulations around cryptocurrencies are still evolving. In the current scenario, they remain unregulated and are not recognised as legal tender. Therefore, individuals must exercise caution when dealing with digital currencies. 

This asset class has seen its share of ups and downs. According to Forbes, Bitcoin returned more than 230% during the ten years ending in March 2021⁴. However, it dropped about 76% in a year from its peak of $68,000 in November 2021 to $16,000 in November 2022.

Benefits Of Investing In Cryptocurrency

• Potential For Quick Returns: Cryptocurrencies involve significant movement over a short period. This can be a high-profit investment opportunity in case of a bull run.
• Accessibility: Crypto is available and accessible to everyone. This enables broader participation from investors.

Limitations Of Investing In Cryptocurrency

• Regulatory Uncertainty: The regulatory environment around crypto in India is very uncertain. Regulatory authorities have issued periodic warnings. Moreover, there have been talks about the potential bans on crypto. 
• Market Volatility: Cryptocurrency markets are highly volatile and unpredictable.  
• Lack Of Consumer Protection: A central authority does not support this market, unlike traditional financial systems. This may lead to security and reliability concerns.

Conclusion

The alternative investment options in India are growing fast. As a result, it presents savvy investors with massive investment opportunities. 

There are many alternatives to non-market-linked investments to consider. The best choice depends on your investment strategy and risk tolerance level. Explore Grip Invest to check out high-yielding fixed-income alternative investments.

Frequently Asked Questions On Alternative Investments

1. Why should an investor invest in alternatives?

Alternative investments like securitised debt instruments, fractional commercial real estate, etc., can improve a portfolio's risk and return profile and enhance total return through access to a broader universe of investments and strategies.

2. What are the risks of investing in alternative investments?

Alternative investments have risks and challenges, including illiquidity, complexity, and non-regulated asset classes like cryptocurrencies. 

As with any investment, it is essential to carefully assess your risk tolerance, conduct thorough research, and seek professional advice before venturing into alternative investments.

3. Is there a safer alternative to P2P lending?

Yes. LoanX is an investment-grade and regulated investment instrument listed on NSE/BSE, offering 12-14% returns. It provides a simplified way to earn predictable fixed income from short-term investments, offering access to new and untapped opportunities while ensuring the safety of your investment.

References:

1. The Economic Times <https://bit.ly/4dqsz38>
2. Business Today <https://bit.ly/3WSaBQc> 
3. Invest India <https://www.investindia.gov.in/indian-unicorn-landscape> 
4. Forbes Advisor <https://bit.ly/3XbmG41>

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