Traditional investment instruments like fixed deposits, provident funds, stocks, and more are options that many individuals across India rely on. However, alternative investments have witnessed a rise in popularity over the last few years.
These asset classes are not highly liquid, which means you cannot easily sell them and convert the proceeds into cash. Additionally, they have the potential for higher returns and greater diversification than traditional investment avenues.
Read on to learn about the different types of Alternative Investment Funds (AIFs), their benefits, and the associated challenges.
Alternative investment funds include a wide range of assets. Here are some of these:
Real estate is a popular investment option that includes investing in properties or property-based securities. You can directly invest in plots, houses, or any commercial property to benefit from rent accrued on your property.
Real estate investments can also generate a regular cash flow if you offer your property on rent. Alternatively, you can invest in Real Estate Investment Trusts (REITs) or real estate mutual funds. With these, you benefit from capital appreciation of tangible assets and a regular income flow.
This investment tool allows multiple investors to pool money and implement numerous strategies to earn better returns. These funds generally target the wealthier sections of investors as the minimum investment amount is higher than traditional options.
You can invest in domestic and international debt and equity markets through hedge funds. Investments in hedge funds are ideal for investors with higher risk tolerance as the fund managers follow an aggressive investment strategy to generate returns.
Note that hedge fund managers charge a high management fee, which is typically 2% to 20% of the total annual returns.
Commodities are natural resources like natural oil, agricultural and industrial products, and precious metals. Investment in these assets not only diversifies your portfolio but also acts as a hedge against inflation.
The price of these alternative assets is not linked to market fluctuations but is influenced by the demand and supply forces, among other factors. Precious metals like gold and silver are among the most popular types of alternative investments.
You can invest in gold, silver, and other commodities by purchasing them directly or indirectly via sector-traded funds or exchange-traded funds.
A mutual fund is an investment option that pools funds from various investors to further invest in avenues such as:
Money market instruments
These funds are managed by professional fund managers, who allocate the assets based on the fund’s objective. You can invest in various types of mutual funds like open-ended, close-ended, debt, equity, and hybrid funds, among others.
Investing in collectibles is yet another type of alternate investment. It includes purchasing and maintaining rare or special physical items. Then, it includes selling them when the value of the assets appreciates. Rare coins, paintings, stamps, wines, and vintage cars are some types of collectibles.
Investing in collectibles is risky since it comes with high costs of acquisition and no dividends or other income until they are sold. Also, there is a risk of potential destruction of these rare assets if not stored or cared for properly.
Investing in collectibles is ideal if you have high knowledge and expertise of these assets and how they are priced.
Private equity is capital investment in companies not listed publicly on any stock exchange. Typically, private equity funds come with a longer investment period and a lock-in period, which ranges between 4 years and 7 years.
The following are the subcategories of this alternative investment option:
Buyout: Acquisition or purchase of a company or its divisions
Growth Capital: Funding the expansion or restructuring of a business
Venture Capital: Investments in startups and businesses in the nascent stage
Venture capital refers to investment in companies. Here, you invest in companies that are in their growth stages and require capital to expand their business. The expected returns are on the higher side because of the higher level of risk associated with it.
Typically, these types of investments come with a longer investment horizon, ranging between 3 years and 7 years.
Cryptocurrency is a digital or virtual currency supported by blockchain technology. It maintains a record of transactions and keeps track of who owns these investments. This system allows investors to buy, sell, or trade them securely.
Peer-to-peer or P2P lending is a concept that enables individuals to get loans from others. This allows investors to lend their money and earn returns through the interest that borrowers pay.
Most P2P lending platforms allow investors to choose the borrower and offer interest rates usually between 12% and 35% p.a. However, P2P lending may involve higher risk. Hence, only investors with a higher risk appetite should choose such options.
Check out some of the advantages that you get to enjoy by investing in alternative investments.
Some AIFs, like precious metals and real estate, are effective ways to get inflation-beating returns. This is because the value of such assets hikes when inflationary forces are in full swing.
If used correctly, the approach of investing in alternative funds, like venture capital, can provide higher returns as compared to traditional investment avenues.
Alternative investments have little to no correlation with conventional investment methods. This makes them a great option to diversify your portfolio. However, these tools require you to have a high appetite for risk.
Like every investment, alternate investments also come with some drawbacks. Before you invest in alternative assets, it is prudent to weigh their shortcomings. Here are some of the drawbacks you should consider:
As AIFs require investors to employ complex investment strategies, it is not always feasible for an individual investor. Owing to the limited availability of reliable information, decision-making and due diligence processes may be impacted.
Most alternative investments are illiquid. It means that you cannot easily sell them, making the conversion to cash difficult. So, it is only suitable for those who can withstand the time it takes to cash out.
Certain alternative options, including hedge funds and commodities, are very volatile. The values of these assets can fluctuate frequently due to various geopolitical and economic factors. Hence, you can invest in these only if you have a higher risk tolerance.
As you may notice, while these investment options are touted as providing higher returns, they also carry considerable risk. Most AIFs have a short track record and have not been tested in financially stressful conditions.
In addition to this, most of these alternative options lack regulatory supervision, making your investment vulnerable if problems arise. The absence of a secondary market also makes it difficult for investors to sell their holdings in these assets.
Hence, it is prudent to invest a conservative percentage of your portfolio in these alternative asset classes. One of the best ways to mitigate the risk of your investments is to invest in different avenues.
So, be sure to put your funds in instruments with varying tenors and risk levels. Find options that suit your objectives and strategies with ease on Bajaj Markets.
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As per the SEBI rules, there are three categories of AIF: Category I AIF, Category II AIF, and Category III AIF.
According to the rules notified by SEBI, an AIF scheme can have a maximum of 1,000 investors.
Under the SEBI Regulations, overseas investment is limited to 25% of the alternative investment funds’ investible assets.
These alternative funds include angel funds, venture capital funds, infrastructure funds, SME Funds, and social venture funds, among others.
The four categories of alternative investments are private equity, hedge funds, real assets (such as real estate and commodities), and tangible assets.
Some of the common types of alternative investment assets include real estate, private equity, hedge funds, commodities (like gold and silver), venture capital, art and collectibles, and structured products. These alternatives offer diversification and potential for higher returns compared to traditional investments like stocks and bonds.
Alternative investment options encompass a range of non-traditional assets, including real estate, private equity, hedge funds, venture capital, commodities (e.g., gold), fine art, collectibles, cryptocurrencies, peer-to-peer lending, and infrastructure.
The popular alternative investments include real estate, private equity, hedge funds, venture capital, and commodities like gold. These options attract investors seeking diversification and potentially higher returns compared to traditional assets like stocks and bonds. They offer diversification and unique investment opportunities, but they also come with varying levels of risk and liquidity.