Diversification is a fundamental investment principle. It decreases the overall risk and assists in minimizing losses. This is where alternative investments come into play in your portfolio. These investments are distinct from traditional ones, and judicious investment in them can help you reach a variety of life objectives.
Recently we came across a platform for investing in pre-IPO shares: Altius Investech which got us thinking, about what are new-age investments available to an investor.
What are alternate Investments?
Alternate investments as the name suggests are the non-conventional or non-traditional investment options that investors can explore. Traditional investments in Bonds, Cash, or stocks either fetch a low return or bring in a high-risk factor for the investors but they are highly liquid. Alternate investments on the other hand can be considerably less risky while fetching investors better returns on their investments.
Why go for Alternate investments
Alternate investments can add a lot of value to an investor’s portfolio. Some of the benefits that can be considered are:
Alternative investments often have a low correlation to more traditional asset groups. As a result, alternative assets give a chance for portfolio diversification, lowering overall risk exposure across investments. Many alternative assets also serve as an inflation hedge. Many investors have discovered private alternatives as a method to diversify their portfolios and hedge against volatility. As a result, if the stock market falls considerably, they have a hedge of protection, and their entire investment portfolio is not damaged. Even in a stable economy, the stock market is notoriously unstable, and alternatives are mostly sheltered from the unpredictable fluctuations in the public markets.
Real estate is a fantastic example. Assume you have a mortgage note investment or a rental property. Even if the stock market has been volatile in recent months, your borrower or tenant will continue to pay their mortgage or rent.
The share price of a traditional public investment fluctuates based on a range of factors (many of which are not directly related to a company’s performance) but is generally not tied to a real asset. Because private investment shares are not publicly traded, you escape the volatility associated with public investments. Furthermore, your investment is usually backed by a genuine asset.
Not all private alternative investments are cash-flowing – that is, they pay you back in cash on a monthly or quarterly basis – but many are, typically as part of a cash-flowing real estate plan. Some can provide a high annual income of 10-12%. Many funds are organized in such a way that investors are paid first, in cash.
Alternate investment options
Pre-IPO and Unlisted Companies
Pre-IPO companies are those that are on a path to an IPO and are going for a listing in the next 1-3 years. There are numerous reasons why investing in these companies might be profitable for investors, whether for financial or other reasons specific to each investor’s interests.
Investors also have an option to invest in unlisted companies long before their IPO. They can invest in such companies for as low as Rs 10,000 in India. As companies are staying private forever, most of the value creation for companies happens at the Pre-IPO stage. This gives investors an opportunity to invest in good companies at a fair price. Investment opportunities like Hexaware, Reliance retail, and Chennai Super kings are investors’ favorites in this space.
Invoice discounting, often known as bill discounting, is a simple and innovative alternative investment strategy in which firms use outstanding bills against blue-chip enterprises. The investment enables investors to purchase outstanding invoices, and at the conclusion of the tenure, investors receive their initial investment amount plus any profit earned.
Non-convertible debentures is debt taken up by firms that cannot be converted into shares or equity. The interest rate on an NCD is determined by the firm issuing the NCD. Individuals, banking corporations, primary dealers, other corporate organizations registered or incorporated in India, and unincorporated bodies can all invest in NCDs. Investors can invest in chunks of this debt for as low as Rs 10,000 and can earn a fixed return on this asset.
Any fund founded or incorporated in India that is a privately pooled investment vehicle that collects funds from intelligent investors, whether Indian or foreign, for investing in accordance with a defined investment philosophy for the benefit of its investors is considered an alternate fund.
Fractional Real estate
Fractional ownership occurs when a group of investors, whether institutional or individual, purchase a Grade A commercial real estate in fractions. They agree to share passive ownership of a high-value CRE by investing in such a property. The resulting returns and income are allocated among the property’s fractional owners. Fractional ownership decreases a single investor’s financial burden while allowing them to create a consistent stream of cash flows and long-term rewards. Furthermore, by investing in many CREs in different areas, investors can diversify their portfolios.
P2P lending, often known as peer-to-peer lending, is a financial innovation that connects verified borrowers asking for unsecured personal loans with investors eager to make higher returns on their investments. Verified borrowers are published on the P2P lending platform, and investors can view all of the borrowers’ information before lending money to them. To diversify their investments, investors can lend small amounts to many borrowers.
Peer to Peer lending is already a very successful alternative funding mechanism all over the world. P2P lending is rapidly gaining traction in India and is gradually becoming a very appealing investment choice for investors. The RBI has already taken notice of this innovation and issued regulations for the sector.
Why are alternate investments not very popular?
These investments have been popular among HNI investors as the minimum investment size used to be very large. But these opportunities are now available to retail investors for as low as Rs 10,000 on platforms such as Altius Investech, Jiraaf, and many more.