Almost everyone is familiar with fixed deposits and stocks when it comes to investing. However, an entire universe of possibilities exists outside these traditional asset classes. The established 60/40 allocation portfolio to stocks and bonds is old school and may not be enough to achieve your long-term investment goals. That is where alternatives enter the picture.
Alternative investments do not fall into traditional asset categories, meaning one cannot easily sell or convert them into cash. Although only high-net-worth individuals (HNIs) initially invested in alternatives for higher returns, many retail investors have recently shown a keen interest in non-traditional investments.
Consequently, alternative investments reached up to $13.7 trillion in assets in 2021. Further, the market research estimates the total dollar value in these classes to cross $23.3 trillion by end-2027. The staggering figures only indicate their growth as more investors try their hand at it.
Now comes the question: what makes them an attractive option to investors? And why should you invest in them? This article will walk you through the concept of alternative investment and its benefits and list some of the finest options to help you get started. So, read ahead!
How Can Alternative Investments Be Beneficial?
Some of the benefits of alternative investments include
- Lower Volatility: The stock market is famous for its unpredictability, even in stable market conditions. Alternative investment, however, is not tied to the stock market like conventional asset classes, which is their most sought-after advantage. It is not subject to public market risks and conditions and reduces the overall portfolio risk.
- Diversification: You can diversify your portfolio by partaking in alternative investments with less risk exposure. Alternatives do not correlate to traditional asset classes and present an excellent diversification method during turbulent times.
- Potential To Earn Higher Returns: Alternative investments like corporate bonds, peer-to-peer lending, and securitised debt instruments offer higher fixed returns than traditional investment options like fixed deposits. Other assets, like startup equity, collectibles, hedge funds, etc., do not offer fixed returns but can potentially provide even better returns than equity markets.
Top 5 Alternative Investment Options
Here are some of the profitable alternative assets worth considering.
- Startup Equity: Equity refers to a slice of ownership that companies offer investors. It is typically expressed as a percentage of shares stock. You purchase a piece of the company with your investment. You put down your capital in exchange for equity, which means a part of ownership in the startup and the right to its potential future profits.
Bootstrapping, crowdfunding, venture capitalists, and angel investors are common ways to obtain startup financing.
- Diversified portfolio
- Early entry at lower valuations
- You can enjoy substantial capital gains if the startup succeeds
It is the highest risk-reward ratio.
- Securitised Debt Instruments (SDI): Securitised debt instruments like asset-backed securities and mortgage-backed securities make up an important part of many alternative investment portfolios. Securitisation refers to pooling individual debts into a tangible asset, a process where assets are transformed into securities backed by those debts.
In the last fiscal year, the Indian securitisation market witnessed an INR 1.8 lakh crore in volume, a big jump from the previous INR 1.35 lakh crore in FY22.
- Diversified pool of loans
- Low minimum investment requirements
- Reduced default risks
SDIs being rated by credit agencies are transparent with regard to their risk. Investors should check the credit rating of these assets and invest only in ‘investment-grade’ bonds.
- Collectibles: Collectibles include items worth more than their original sale price. They can be classic cars, stamps, art, wine, coins, and other assets, not bonds, shares, real estate, etc. However, keeping it in a stellar condition is imperative to get the most money out of your piece.
In essence, these refer to items whose value increases over time. Rather than an income source, investors indulge in collectible investment as a hobby. Their market size is estimated to cross $1 trillion by 2033 at a 6.2% CAGR, on average, for all collectible products.
- Rewarding and appreciating returns
- You can make a collection of the items you are passionate about
- Portfolio diversification
Because of authenticity, collectibles are more speculative and riskier than traditional investments and other alternatives. You must have in-depth knowledge to trade and succeed when dealing with them.
- Hedge Fund: Hedge funds are financial establishments engaging in private investments. They collect and accumulate money from accredited investors. A professional manager pools and manages the funds and employs novel strategies to earn above-average investment returns.
The hedge fund industry has grown by $118.4 billion in the U.S. from 2018 to 2023 as more investors aspire to seek higher returns and diversification. As the name suggests, hedge funds act as a barrier to market volatility and offer attractive interests.
- Reduced risk and volatility
- A variety of investment styles are available to enable you to customize the investment strategy
- Expert advice and access to professional investment managers
Hedge funds accompany a moderate risk level.
- Peer-to-Peer Lending: Peer-to-peer lending has ascended as a feasible substitute for traditional bank loans. Peer-to-peer lending allows borrowers to seek loans from individual investors. The India P2P lending market is forecast to reach $10.5 billion by 2026.
It is a lending platform where investors can lend money directly to borrowers through an online platform, eliminating banks/NBFCs as the middlemen. The platform levies charges and success fees for successful lending transactions.
Banking and financial institutions often retain the difference they receive between interest paid and interest earned. P2P lending platforms move the banks out of the equation and enable you to gain extra interest on your invested money at the end of the term.
- Varying interest rates depending on the loan amount and associated risk
- High returns to the investors
- The online environment and work process make it quick and convenient
The risk factor for peer-to-peer lending is moderately low.
The Bottom Line
Alternative investments are compelling for investors aspiring to yield better returns and minimise risk. Investing in alternatives may seem daunting and arduous, especially if it is your first time. However, practical tricks and guidance can help you overcome the cons and relish the opportunity.
Various alternatives are available, and selecting the best depends entirely on your overall investment strategy. Conducting proper and in-depth research to evaluate your options can give you a hand in making an informed decision and strategising.
Are you planning to invest in alternative investments and build a portfolio beyond traditional market-linked products? Visit Grip today to explore various alternative investments that overstep inflation, volatility, and unpredictable returns.
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