The only thing constant in the financial world is change. Therefore, your need to keep up with this evolving world is paramount. Gone are the days when traditional investment options like stocks, fixed deposits, and gold were enough to fulfil your financial goals.
With markets becoming increasingly dynamic and unpredictable, it is crucial to adapt to alternative investments to bring diversification and maximise your returns on investments. Alternative investments are gaining popularity among investors. But what is the reason behind this popularity? Read the article below to know why you should incorporate alternative investments into your portfolio.
Diversification in investment portfolios is essential for prudent investors. Some reasons you should consider diversifying your portfolio are:
Stocks represent ownership in a company. Various companies issue their shares, looking for investors willing to buy them against money. However, this investment option has both profitability of exponential returns and risk uncertainty. Let us discuss the benefits and limitations before investing in stocks.
Stocks offer the potential for significant capital appreciation compared to other financial investments.
Stock prices can be highly volatile, subject to market fluctuations and economic conditions.
Stocks are highly liquid, allowing buying and selling them quickly on the stock exchange.
Risk of Loss
Stocks carry a high risk of losing your investments, especially in case of a company’s bankruptcy, drop in earnings, analyst’s expectations, corporate governance issues and negative news
Some stocks pay dividends, providing a regular income stream for investors.
Brokerage and Other Charges
This investment option involves brokerage and charges like STT, Exchange Transaction Charges, GST, etc, which reduces the net return on investment (ROI).
Fixed Deposits are a type of financial investment offered by banks in which you deposit a specific amount of money with the bank for a fixed period. This period could be anywhere from a few days to several years.
Either you keep on getting monthly/quarterly interest, or upon maturity, you get your principal amount with the pre-determined interest. The benefits and limitations of FDs are as follows:
Fixed deposits are considered safe investments based on bank backing.
FDs typically offer lower returns than other investments like stocks and mutual funds.
FDs provide a fixed interest rate, ensuring a predictable ROI.
Penalty On Premature Withdrawal
In case of a pre-mature withdrawal, you must pay the bank a penalty.
It also provides a secure place to store surplus funds, which can be liquidated at a penal cost.
FD returns may not keep pace with inflation, reducing real purchasing power over time.
People have been investing in gold since time immemorial. You now have varied methods to invest in gold besides buying physical gold, like sovereign gold bonds, digital gold, gold ETFs, etc.
Hedge Against Inflation
Gold often performs well during inflationary periods to hedge against eroding purchasing power.
No Income Stream
Unlike stocks or fixed deposits, gold does not generate any regular income, or it is nominal.
Gold is a perfect hedging asset. It can act as insurance against geo-political emergencies, market crashes and financial crises, offering stability and protection to investors' wealth.
While gold can serve as a haven, it is not immune to price fluctuations and can experience periods of high volatility.
Incorporating gold in the investment portfolio can enhance diversification and reduce overall portfolio risk.
Storage and Security
Physical gold requires secure storage, which may incur additional costs.
As an asset class in India, alternative investments like real estate and securitised debt instruments (SDIs) like lease financing, invoice discounting, startup equity, etc., have grown recently. Let us discuss why you must incorporate alternative investments in your portfolio:
Despite the potential benefits, alternative investments come with their risks and considerations:
While stocks, fixed deposits, and gold are essential parts of an investment portfolio, exploring alternative investments can provide new and exciting diversification benefits. Incorporating alternative investments will complement your traditional holdings.
Explore Grip Invest and discover various alternative investments to diversify your portfolio. It is an investor-first digital investment platform to help you access curated non-market-linked alternative investment opportunities.
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