Even though they can be difficult to liquidate sometimes, they carry high potential for returns, often outperforming the market when held for the long term. They also provide diversification benefits to a portfolio, making them much sought after investments.
Why Invest in Alternative Investment Options in India?
Potential for Higher Returns
Alternative investments are becoming increasingly popular among investors as a viable investment option. One of the main advantages of alternative investments is their potential for higher returns compared to traditional investments. This is because they often involve higher risks and are not as heavily regulated, which can lead to more opportunities for alpha generation.
Diversification Benefits
Additionally, alternative investments can provide diversification benefits to an investor's portfolio, which can help mitigate risk. They are usually not correlated to traditional investment instruments such as stocks and bonds, meaning they can provide returns even when other asset classes are performing poorly.
Diverse Investment Opportunities
Moreover, when you invest in alternative investments in India, you can gain access to unique investment opportunities that may not be available in traditional asset classes. For instance, taking the private equity investments route may offer exposure to early-stage companies with high growth potential.
Protection Against Inflation
Some alternative investment options in India, such as real estate and commodities, may provide protection against inflation much better than traditional assets. As prices rise, the value of these assets may also increase, providing a hedge against inflation. For instance, commercial real estate provides an average rental yield of 9.5% p.a. compared to the average fixed deposit returns of 6% p.a. or even gold’s return of 9.4% p.a.
What Are The Types of Alternative Investment Options to Explore in India?
1. Private Equity
Private equity (PE) investment is a form of alternative investment where you can invest in private companies that are not publicly traded. You get the opportunity to invest in companies that have high growth potential but are not yet mature enough to go public or be acquired by larger companies. These investments can involve a variety of investment strategies, including venture capital, growth capital, and buyouts.
Private equity investments can be a good alternative investment option in India as the country is home to many fast-growing companies with high potential for growth. Private equity investors can provide these companies with capital, strategic guidance, and operational expertise to help them achieve their growth potential. However, PE investments typically require a higher minimum investment threshold than other alternative investments such as P2P lending or fractional real estate.
2. P2P (peer-to-peer) Lending
P2P lending is another good alternative investment option for investors in India looking to earn higher returns than traditional fixed-income investments such as savings accounts, CDs, and bonds. Here , you lend money directly to borrowers through online platforms, bypassing traditional financial institutions. P2P lending can provide diversification benefits to your portfolio as investments can be spread across a large number of loans and borrowers. There are many online portals that allow you to do P2P lending and earn returns anywhere between 12%-35%.
However, as with any form of investment, you should be cognizant of the risks that come with P2P lending – borrower default, high fees of platforms and poor risk management are some of the aspects to consider.
3. Real Estate
Real estate, to many people’s surprise, is another alternative investment option in India. Unlike other alternative investments, it is great for those looking for capital appreciation and income generation. While the initial capital invested often grows exponentially over time, rental income or lease income provides regular returns. For HNIs looking to grow their portfolio even further, commercial real estate can be a viable option. Commercial real estate often provides higher returns than residential real estate, both in terms of rental or lease income, and capital appreciation.
For those who do not have enough capital to buy standalone real estate, then fractional real estate is a particularly interesting option. Fractional real estate allows investors to own a portion of a property, reducing the investment threshold and increasing liquidity. Usually, these fractional real estate properties also come with long-term tenants, thereby assuring regular return right at the outset.
Fractional real estate is different from REITs or Real Estate Investment Trusts. For one, REITs are publicly traded on stock exchanges like shares whereas fractional real estate does not. Instead, you become a fractional or sharing owner in the property in proportion to the amount of capital that you contribute. REITs also require much lower investment amounts than fractional real estate investments. REITs are governed by the Securities and Exchange Board of India while fractional real estate investments are not yet regulated in India, giving a lot more room for diversification and distribution of gains. If you are interested in investing in pre-leased commercial real estate or fractional real estate in India, you can explore the offerings from PropReturns.
4. Invoice Discounting
Another popular alternative investment option in India for high net-wroth individuals is invoice discounting. It provides investors looking for short-term, low-risk investments with regular income. In invoice discounting, investors purchase the unpaid invoices of a company at a discount, providing the company with immediate cash flow while earning a profit for themselves when the invoices are eventually paid.
There are many online platforms that have allowed companies to skip the long and bureaucratic lines of banks to get invoice discounting from HNIs instead. They match vendors with potential investors for invoice value that goes into lakhs and crores. However, one must be careful while investing in invoice discounting as it entails risks such as default risk and poor creditworthiness. It is always advisable to evaluate the investment opportunity, the creditworthiness of the companies issuing the invoices, and the potential risks involved.
5. Commodities and Other Investments
Wine, art, vintage cars, and relics are all other alternative investments to dabble in. Aged liquor is often an investment that many HNIs tend to make, even if they do not want to consume it themselves. The value of many of these assets increases over time. However, they can be quite illiquid investments and finding buyers for them can be complicated. Nevertheless, including these in your portfolio can provide a good diversification element.
Pros and Cons of Alternative Investments
Pros:
Diversification
Alternative investments can provide investors with exposure to different asset classes and markets, potentially reducing overall portfolio risk and enhancing diversification.
Potential for high returns
Some alternative investments, such as private equity, hedge funds, and commercial real estate, can provide investors with potentially high returns that may outperform traditional investments like stocks and bonds.
Unique investment opportunities
Alternative investments such as art, commercial real estate or private equity can provide access to investment opportunities that are not available through traditional investment channels.
Lower correlation to traditional investments
Many alternative investments have a lower correlation to traditional investments, meaning that they may not move in the same direction as stocks and bonds and can provide additional protection during market downturns.
Cons:
Higher risk
Alternative investments can be riskier than traditional investments due to their illiquidity, complexity, and lack of regulation. However, you can overcome this with adequate research and background checks.
Lack of transparency
Many alternative investments have a limited amount of information available to investors, making it difficult to evaluate their potential risks and returns. Choosing the right investment advisor can help you get better information on different kinds of investments.
Higher fees
Alternative investments can come with higher fees than traditional investments, such as management fees, performance fees, and carried interest. However, when compared to the returns that they provide, this fees is often justified.
Illiquidity
Many alternative investments are illiquid, meaning that they cannot be easily sold or converted to cash. This lack of liquidity can limit an investor's ability to access their funds when needed. However, some classes of investments such as real estate will always have buyers.
Overall, alternative investments can be a valuable addition to a well-diversified portfolio, but investors should carefully evaluate the potential risks and benefits before investing. It's also important to work with a financial advisor who has experience in alternative investments and can provide guidance on the investment process.
What Are Some Tips to Get Started with Alternative Investments in India?
1. Do your research
Before investing in any alternative investment, it's important to do your due diligence and research the investment opportunity thoroughly. Learn about the investment structure, the risks involved, and the expected returns. You can also seek advice from financial professionals who specialize in alternative investments to help you make informed decisions.
2. Set clear investment goals
Determine your investment objectives and the amount of capital you are willing to invest. This will help you choose the right investment options that align with your financial goals. For instance, if you have an investment budget of Rs. 2-3 crores, you could invest in commercial real estate. However, with a smaller budget of Rs. 50-75 lakhs, you can still invest in fractional real estate.
3. Diversify your investments
As with any other investment, do not put all your eggs in one basket. Consider diversifying your investment across two to three asset types. For instance, you could put 20% of your alternative investment fund in art, 60% in commercial real estate, 10% in private equity and another 10% in P2P lending. This will ensure that your risks are covered.
4. Stay up-to-date with market trends
Keep up-to-date with the latest market trends and news related to alternative investments. This can help you make informed decisions and identify new investment opportunities that align with your investment goals.
Final Word
Alternative investments are an asset class that are not correlated with traditional investment instruments. They help you diversify your portfolio, have the potential to earn you higher returns and provide unique investment opportunities that traditional investments cannot. For instance, through private equity, you can get access to new and upcoming businesses. Through commercial real estate, you can benefit from capital appreciation and regular rental income that is higher than residential real estate. You can also choose to invest in aged liquor, commodities and art as alternative investments.
However, you should always be cognizant of risks associated with investments such as illiquidity, lack of regulation and potential default. Once you have done your research and consulted with your financial advisor about including alternative investments in your portfolio, you should work towards making these investments as quickly as possible.
If you are interested in investing in commercial real estate, pre-leased properties or fractional real estate investments, then PropReturns provides you with the best options in the country. We sell high-quality Grade A real estate in the top markets in India and make real estate investing super easy! Check out our offerings here.
