Why Alternative Investments Matter Today: Top 5 Alternatives For Savvy Investors In 2023

Over the past few years, India's investment landscape has witnessed a considerable shift to emerging investment alternatives. Conventionally it was a preserve of big institutional investors, but the tide has changed with the emergence of alternative investments. These alternatives have gained popularity because of their potentially high returns and portfolio diversification. This article offers insights and an overview of recent alternative investment trends in India that can help investors capitalize on emerging opportunities and make sound investment decisions. 

Overview Of Recent Alternative Investment Trends In India

Alternative investments refer to other asset classes besides traditional alternatives, such as fixed deposits, cash, and stocks. These alternatives offer investors high returns and diversification through Hedge Funds, Commercial Real estate, Asset Leasing, Venture Capital and Private Equity, Peer-to-Peer Lending, Cryptocurrencies, etc.

Like most emerging investment options, affluent individuals with higher net worth are among the first to embrace alternative investments. With the increasing digitization of retail investment practices and the growing trend of fractionalization, alternative investments are gradually finding their place in portfolios of various sizes.

It is projected that investments through alternative investment funds will experience a significant CAGR of 25% from 2022 to 2025. Interestingly, India and other emerging economies are poised to witness the next surge in alternative investments.

Analysis Of Market Shifts And Merging Opportunities 

The alternative investments market in India is expected to grow significantly over the next decade. India is among the emerging economies primed to benefit from the new wave of alternative investment growth, promising numerous opportunities to savvy investors. 

For instance, as of 2022, nearly 900 alternative investment funds (AIFs) were registered under the Securities and Exchange Board of India (SEBI). Over the past decade, there has been a 63% CAGR in capital commitments, with alternative investment assets under management (AUM) expected to grow to almost $17.2 trillion by 2025. 

Although these investment alternatives are quite new, they are quickly gaining acceptability, resulting in new and exciting opportunities for experienced investors. This is helped by the fast-growing Indian population of individuals joining the high-net-worth class. Demand is high for user-centric, secure, reliable, and transparent alternative investment vehicles. Besides increased demand, the expansion of the Indian market and the rest of Asia plays an important role in the shift as a source of capital for investment and an opportunity for fund managers to deploy capital.

5 Top Alternative Investment Vehicles For Savvy Investors In 2023

India’s evolving economic landscape is home to various investment vehicles that offer access to various alternative investments.  As mentioned below, these vehicles offer access to assets in various segments that are ideal for diversifying an investment portfolio.

Commercial Real Estate

Commercial real estate is an alternative investment asset that offers predictable, fixed-income returns generating multiple income streams. Commercial assets like shops, offices, warehouses, etc., are safe investments that offer recurring rental revenue and capital appreciation in the long run. 

However, investing in real estate is cumbersome and requires a large initial investment and excessive due diligence. As an alternative, fractional real estate allows investors to own some of such assets while enjoying all the benefits.

Learn how fractional real estate and new-age investment discovery platforms transform the investment landscape.

Hedge Funds

Hedge funds represent a category of non-traditional investment funds that gather capital from investors to engage in the trading of domestic and international debt, as well as highly risky equities markets. These funds can utilize diverse investment tactics, such as short selling, leveraging, and derivatives. Compared to mutual funds and other investment fund types, hedge funds operate under flexible regulatory obligations, granting them increased manoeuvring ability in investment strategies and yielding elevated returns.

Private Equity And Venture Capital

The thriving start-up ecosystem in India has been a driving force behind 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 or those experiencing rapid growth in exchange for ownership shares. These investments promise substantial returns, especially when start-ups mature or achieve profitable exits. For instance, in the last 13 years, private equity funds in India have raised close to $100 billion.

Peer-to-Peer Lending  

P2P lending is among the leading alternative investment classes in India. It involves facilitating direct connections between borrowers and lenders via online platforms. This lending model allows individuals and small businesses to obtain loans without relying on conventional financial intermediaries. According to this model, investors deploy funds on lending platforms such as Faircent, Lendbox, and Liquid Loans to earn interest based on borrowers' repayment. Unlike conventional financial institutions with stringent rules on who can borrow and at what rate, P2P lending has fewer restrictions on who can borrow. The only downside for people who fail credit checks is being hit with high-interest rates on loans. 

Cryptocurrencies 

Cryptocurrencies have, in recent times, gained popularity because of their potential high returns and decentralized nature. But because of their complexity and volatility, they are often considered high-risk investment alternatives. Investors must note that the regulatory environment around cryptos is still evolving in India. The government acknowledges the need to protect investors and maintain financial stability. Therefore, it is recommended that individuals exercise caution when dealing with digital currencies. Nevertheless, as adopting cryptos becomes more mainstream, they are becoming an alternative for high-risk tolerant investors that don’t mind the uncertain regulatory framework.

Potential Risks And Challenges Of Alternative Investments 

Like most forms of investment, alternative investments also have challenges and risks:

Lack Of Liquidity: One of the main challenges investors should be aware of about alternative investments is their illiquid nature. Unlike conventional investments, alternative investments lack liquidity as they have longer lock-in periods and limited liquidation avenues. For instance, venture capital, private equity funds, and some hedge funds tend to have longer lock-in periods, which might make it challenging to access invested capital. 

Regulatory Challenges: Some alternative investments, such as cryptos, operate in regulatory grey areas. The changing regulatory landscape can pose uncertainties and risks for investors. Therefore, the changes in regulations or the introduction of new compliance requirements may impact the viability and profitability of these alternative investments.

Bottom Line 

The alternative investment space in India is growing fast, and as a result, it presents savvy investors with massive investment opportunities. From Real Estate to Cryptocurrencies, the alternatives to consider are many depending on one's investment strategy and risk tolerance level. Although these vehicles and products offer diversification and high returns to investors, it is crucial to note that they also have certain associated risks. Therefore, investors should conduct thorough research and seek expert opinions before investing in these products. 

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