As India continues to grow into an economic powerhouse, investors are increasingly looking for investment opportunities outside the traditional investment ecosystem to back their portfolio and safeguard their wealth from future financial setbacks.
That’s the whole reason why alternative investment funds in India are rapidly gaining traction in the Indian financial market. Additionally, with the rising market volatility, increasing interest rate, and uncertainties and lack of trust in publicly traded securities and markets, investors are finding alternative investment as a lucrative space to invest.
A research conducted by data tracker firm Preqin reveals that the alternative investment industry is expected to grow by 59% by 2023, reaching $14 trillion in assets in five years.
Fundamentally, alternative investment funds (AIF) are investments in asset classes other than the conventional mode of investment – assets that don’t reflect the ups and downs of the traditional market. This kind of investments doesn’t follow the usual growth trajectory of conventional securities and provide broader diversification, reduce risk, and enhance returns.
The fact that AIFs are considered as low-risk investments and provide good hedges against market inflation makes alternative investment funds as a remunerative option to invest.
Alternative investments consist of arts and antiques, precious metal, vintage coins, rare stamps, and other collectables, in addition to share in startups, commodities, and more. In India, AIFs are classified into 3 categories. Each of these categories come with pre-defined objective and constitution in terms of securities, assets classes, and structure. Principally Category I and Category II centers around non-leveraged, unlisted instruments and asset classes, whereas Category III focuses on leverage-able listed securities across asset classes like equities, debt, and commodities.
Fundamentally, alternative investment is anything that doesn’t fall under the traditional market commodities. These investments don’t fall under the mainstream market, and hence, doesn’t imitate the usual growth trajectory of traditional securities. There are several kinds of AIFs to invest in; here are the few:
Private equity is an umbrella term that comprises the entire investment spectrum of the private capital markets. This alternative asset class consists of securities that are not listed in the publicly traded markets.
Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity.
Peer-to-peer (P2P) lending is a relatively new phenomenon in the alternative investment space. P2P lending is also known as crowdfunding and has only existed since 2005. It enables individuals to get access to capital directly from investors.
P2P platforms provide funds for borrowers either delayed or denied from conventional financial sources like banks and the probability of high returns for lenders who take on the risk of funding such borrowers.
Gold is often considered as an excellent alternative asset and a long-term store of value to rely on. Hence, it is viewed as a profitable option and a great diversifier as compared to the conventional mode of securities.
Investors have various ways to get exposure to gold. They can opt to buy physical gold such as coins and biscuits, or buy gold exchange-traded funds (ETFs).
Invoice discounting is the process of a business raising fund against their unpaid invoices to get access to working capital. Invoice discounting is increasingly turning out to be a great option to invest and earn money in a short time.
These days, several companies are offering investors options to invest in unpaid invoices of blue-chip companies to make high returns.
Real Estate & Infrastructure
Real estate is another alternative asset class that is gaining traction among investors. Both real estate and infrastructure are a great option for risk-averse investors, particularly when the market is in a bearish mode.
Why Should You Consider Alternative Investment Funds?
Here are a few reasons why investors increasingly prefer AIFs as an excellent investment option to consider.
Once used by big organizations and endowments, a previous couple of years have seen alternative investments quickly turn mainstream. Alternative investments are gaining popularity among investors, as they are an excellent way to improve portfolio diversification. A diverse portfolio seeks to deliver high yields at low risk by investing in a broad range of assets that would react differently to the same market events.
Since AIFs come with low correlation to the conventional asset classes, they are considered as an excellent diversifier against market inflation. As such, adding alternative funds to the investment portfolio will reduce the volatility issue and provide a good hedge against inflation.
Diversification is one in all the key reasons why many institutional investors (including pension plans, endowments, or foundations) invest in alternative assets.
Reduces Portfolio Volatility
Investing in conventional modes of securities implies that investors will concentrate on the absolute outcome without any significant risk of volatility. Adding alternative investment with no interrelationship and high returns considerably scale back risk. It helps reduce the hazard related to market fluctuations and unfortunate economic events. By doing this, investors can lessen volatility levels, ultimately sanctioning a secure and stable investment portfolio.
Explores Unconventional Asset Classes
AIFs deals with a wide array of asset classes, providing investors with ample choices to invest. This not only leads to higher returns but also significantly reduces market risks.
Provides New Exposures and Opportunities
Being diverse in nature, alternative investments are often used by investors to hedge against market volatility and reduce portfolio risks. Since AIF consists of a huge number of asset classes, it provides investors with opportunities to find commodities per their preference. An investor can choose to invest in start-ups, gold, real estate projects, and more.
These days, several alternative investment options are available to increase returns exponentially, for instance, P2P lending, private equity, hedge funds, real estate, crowdfunding, invoice discounting and more.-
Considering the current market scenario, market volatility is likely to still be a roadblock for investors. Moreover, heading into such uncertainty, it’s essential for investors to remain targeted and rummage around for alternative investment opportunities to diversify and safeguard their portfolio against market inflation, rising interest rates, and more.