“Don’t put all your eggs in one basket.”
When we talk about investing, two options come to mind – stocks and bonds.
However, to have a diversified financial portfolio, it is essential to include various investment options. This will help spread out the risk and ensure that your money is working for you in the most efficient way possible.
One of these investment options is Alternative Investments.
It is a type of investment that is different from the traditional options, such as stocks, bonds, and cash. Alternative investments include gold, real estate, cryptocurrencies, etc.
Alternative investments can be a great way to diversify the portfolio, and they can offer returns that are different from the traditional options.
Historically, these assets have also provided good returns to the investors.
Real estate has also provided an average return of 10% in the past ten years.
The most promising cryptocurrency (Bitcoin) has climbed a staggering 9,000,000% between 2010 and 2020.
Benefits of Alternative Investments
Including alternative investments in the portfolio has many benefits, some of them are:
- They are an excellent way to hedge against risk, as they tend to be less volatile than other types of investments.
- Alternative investments are not significantly correlated to bonds and stocks; therefore, they will be less impacted by stock and bond market swings, thus giving more diversification benefits.
- They can also provide opportunities for earning higher returns than traditional investments.
Types of Alternative Investments
Various types of alternative investments are available in the market; seven promising alternative investment options are:
Gold is a precious asset and is a hedge against inflation. It has been considered a safe investment option for centuries. It is unaffected by market fluctuations and offers a decent return on investment.
As of 6th Jan 2021, India holds privately held gold worth $1.5 trillion.
Gold is not only used as jewelry, but individuals and the Government also use it to get out of a crisis.
It is believed to be a liquid asset, i.e., one can convert it into cash quickly.
Since it is not correlated to stocks and bonds, it is considered suitable for diversification.
Over the past 20 years, gold’s return in rupee terms has been 12.4%.
2. Real Estate
Real estate is one of the most common and most significant asset classes.
It is a tangible asset that provides a stable return. In addition, the potential for capital gain is often higher with real estate than with other types of investments.
It also has a feature similar to bonds, i.e., it can provide a steady stream of income through rental payments.
However, there are also some potential downsides to investing in real estate. The purchase and sale of real estate can be complex, and the level of liquidity is lower than other types of investments.
If investors want to invest in real estate, they will require a large sum of money compared to other investments.
If investors want to invest in real estate but do not want to buy a tangible asset and want liquidity, they can invest in Real Estate Investment Trusts(REITs).
A real estate investment trust (REIT) is a pooled fund that buys or operates or finances real estates that provide regular income. REIT is traded in the market, making it highly liquid. In REITs, investors can also invest with small amounts of money.
Commodities are physical items such as metals, grains, and energy products that are used as inputs in the production of other goods. They are traded on global markets, and their prices can be affected by various factors, including supply and demand, economic conditions, and political events.
There are various advantages of investing in commodities. One is that they can provide diversification for the portfolio. Commodities can be less volatile than stocks and can help to protect against inflation. They can also be a hedging instrument against volatility in the stock market.
Investors do not require large sums of money to invest in commodities.
4. Private Equity
Private equity is a term used to describe investments in not publicly traded companies but also privately held companies. These investments are usually made by private equity funds structures, which pool money from institutional/HNI investors such as pension funds, insurance companies, and endowments and invest in private companies.
Private equity investments can offer much higher potential returns than other investment options, such as stocks and bonds. On the other hand, it can be pretty risky if the investments don’t achieve the desired returns.
Investors will require a large sum of money to invest in private equity.
5. Hedge Funds
Hedge funds are investment vehicles that pool money from several investors and use various strategies to generate returns.
These strategies can be defensive, such as hedging against market downturns, or offensive, such as seeking to outperform the market. They also use leverage, or borrowed money, to increase their return on investment.
They are often considered as a way to bet on or against the market. They can offer a lot of flexibility and potential for high returns. On the other hand, they can be quite risky and may not be appropriate for everyone.
Individuals will require a large sum of money to invest in hedge funds, so it is not very suitable for retail investors.
6. P2P Lending
One of the most recent forms of alternative investments is a peer-to-peer lending (P2P).
It involves a platform where individuals commit their own money to let others borrow it. Investors are paid back in small installments, i.e., interest.
It is just like a loan that you are giving to a borrower through a bank or NBFC.
However, the platform you select must be safe and trustworthy.
One of the powerful developments of our time is the emergence of cryptocurrencies. In the span of just a few years, digital currencies have gone from obscurity to disrupting the global market.
When you look at the impressive volume, the staggering growth, and the jaw-dropping returns, it’s no wonder that cryptocurrencies have captured the public’s fascination.
Between 2010 and 2020, Bitcoin, a cryptocurrency, has climbed a staggering 9,000,000%.
Cryptocurrencies are digital or virtual tokens through which one can do transactions. They use cryptography to secure transactions. They are also decentralized, i.e., no Government or financial institution controls/regulates them. Cryptocurrencies can be traded quickly and easily anywhere in the world.
However, cryptocurrencies are volatile, and their prices can fluctuate rapidly. Since any government or central bank does not control them, they are not as stable as traditional currencies.
Investors can also invest in non-fungible tokens (NFT), a new form of a unique digital asset. Another token cannot replace it as it has unique identification codes and metadata. It includes art, songs, videos, gifs, personal collections, tweets, etc.
Alternative investments can play an essential role in a well-diversified portfolio. They help to reduce the overall risk while providing the potential for higher returns.
Each alternative asset has its unique characteristics and risks. Thus, it is crucial to understand the risks and potential rewards before investing in any type of alternative investment.
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