In highly uncertain times, investors should seize any opportunity available in the market to create a well-diversified and sound financial portfolio. The Covid-19 times have taught salaried individuals the importance of having a passive source of income, apart from the regular monthly salary. In the last few years, several new alternative investment avenues like REITs, peer-to-peer lending, cryptocurrency etc. have emerged. All of these have proven to be high-yield asset classes. However, before making any investment, it is very important to assess the pros and cons of assets vis-à-vis one’s investment appetite. A well-balanced portfolio backed by cautious and calculated decisions can help a lot in wealth creation in the long run.
According to Bhavin Patel, Co-founder & CEO, LenDenClub, there has been a boom in fast-growing FinTech companies. With their tech-backed, customer-friendly solutions, they offer plenty of investment avenues. “For instance, a large chunk of new mutual fund investors are now being added by wealth-tech platforms. Low commission stockbroker platforms have already revolutionized the stock investment market. Peer to Peer (P2P) lending platforms have brought much better returns generating debt instruments to investors etc. Mutual funds or stocks are known instruments. However, P2P lending is a new kid on the block to give people diversification options in their debt portfolio,” Patel told FE Online.
“Lately, investors are also exploring other alternative investment tools like lease financing, venture capital, fractional investments in US stocks or real estate, etc. that allows them to have a diverse portfolio,” he added.
In recent years, the global alternative industry has grown at a rapid pace, driven by the need to increase diversification and enhance returns. This growth is underpinned by several external conditions such as lower interest rates, declining pension funding ratio, the maturation of emerging markets, structural change in capital formation, and the pandemic-infused market volatility.
WintWealth Co-founder Anshul Gupta cited a study by CAIA Association, which says that alternative investments contribute approximately $13 trillion (or 12%) of the global investible market, comprising hedge funds/liquid alternatives, private equity, real assets, and structured products. By 2025, the industry is expected to grow to 18-24% of the global investible market. India’s alternative investment industry is still at a nascent stage as compared to the rest of the world. Asset under management (AUM) for alternative investments in India is estimated to be $54 billion as of June 2020.
Alternative Investment Options comprise a wide range of non-traditional assets such as P2P lending, covered bonds, receipt financing, asset lease financing, etc.
“Alternative investments were exclusively available to HNIs owing to their unconventional and unique nature coupled with inadequate public information surrounding them. But several personal investment companies have also contributed to the increased awareness and demand around alternative investments by making them available to the regular retail investor,” Gupta said.
He further said that alternative investments can become a hedge against inflation, as they are not directly correlated to the market. AIF’s can also help generate a passive income, which is a recurring theme across some options, if not all, alternative assets. The interest payments can help you post-retirement.
“AIF’s can be great portfolio diversifiers and help mitigate risks, generate passive income as they offer safer yields, and not all but some are tax-efficient. However, one must be wary of risk, regulation, and lock-ins associated with them. They are more complex than traditional investment vehicles. Even though the AIFs are not directly linked with the market, it is crucial to monitor market, credit, liquidity, counterparty, and operational risks. Every investment carries its benefits and risks. Therefore, it becomes crucial to invest through platforms that are transparent and can help you make informed decisions,” said Gupta.
Sudarshan Lodha, Co-founder of Strata, said alternative investment does not include assets that typically fall under the category of stocks, bonds or cash. They are non-traditional investment platforms that are not directly correlated to markets and yet offer a great source of alternative income besides portfolio diversification.
“Owing to the pandemic and volatility of the market and economy, there has been a drastic shift in investor sentiments towards alternative asset classes. Investors are now looking for investment avenues that, along with long term appreciation, would also offer guaranteed passive income. While we have seen the rise of a host of new-age wealth-tech platforms such as P2P lending, cryptocurrency, investment in US equity among others, today even traditional sectors such as real estate are now re-inventing and evolving to offer themselves as an investment platform. Fractional investment in commercial real estate (CRE) is the latest on the block. While the concept is well-established in the US and the UK. it is picking up significantly in India wherein it aims to democratise CRE for larger audiences in the country,” said Lodha.