Historically, alternative investments have been a preserve of high-net-worth individuals and institutional investors, but they have recently become popular among retail investors. With fluctuating market conditions, investors may look outside traditional stocks and commodities to other options. All assets purchased outside conventional investments are referred to as alternative investments. These high-risk short-term investments are uncorrelated to the equities market and are unaffected by market fluctuations. Many platforms in India, such as KredX Invest App, offer investors these assets that include invoice discounting, and alternative investments.
Alternative investments give investors a chance to diversify their portfolios, reduce the effect of market volatility and help them attain their investment goals in the long term during a market downturn. However, it is vital to note that although these investments can promise high returns, they come with more risks and complexities. Therefore, it is important to understand the different strategies available to make informed decisions about the significance of alternative investments to their portfolios.
What are alternative investments?
Alternative investments are assets beyond traditional instruments, such as cash, fixed-income securities, and equities. Since alternative investment funds (AIFs) are uncorrelated to conventional investments, they are important in portfolio diversification, and their return profiles differ from those of traditional instruments. The goal of alternative investments is to generate higher returns than traditional investments by investing in non-conventional assets.
Some popular AIF investments include venture capital, private equity, hedge funds, infrastructure, collectables, invoice discounting investment, digital goal/silver, ETFs, and other assets. In India, AIFs are private funds not regulated by any agency in the country. To determine whether alternative investments are worth adding to your portfolio, you need to understand both their benefits and risks.
Why consider alternative investments in your portfolio
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Diversification
Alternative investments don’t correlate with conventional assets. As a result, they are good for the diversification of your investment portfolio by acting as a safety net when equity markets are down. Most importantly, the strategy helps dampen volatility without affecting returns and can mitigate losses and boost risk-adjusted returns.
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Increased returns
Most alternatives are high-return investments relative to conventional returns. For instance, invoice discounting investment from KredX, an invoice discounting platform offering working capital loans, can generate returns of up to 20% within 90 days. AIFs can enhance a portfolio’s risk-return profile and boost total returns because investors can access a wider variety of assets and investment strategies. Although these assets promise high returns, they may come with increased risk.
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Hedging against inflation
The return rate of conventional asset classes is typically low, and some instruments may perform better than the rest but will also have a higher risk. Regardless of which asset class you choose, it’s important to consider inflation and adjust your expected returns accordingly.
Independence from a regulatory perspective
As stated earlier, AIFs are not under the jurisdiction of any Indian regulatory agency, which means from a regulatory perspective, you have more feed relative to regulations governing equities. On the other hand, traditional money markets are highly regulated, which may pose challenges for retail investors. Interestingly, alternative investments don’t have stringent regulations, making portfolio diversification and experimenting with different assets easier.
Drawbacks of alternative investments
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Available to accredited investors
The minimum investment for most alternative investment funds is high. As a result, they are available to accredited investors. Additionally, alternative investments are associated with high fees. As a result, inexperienced investors need a strong understanding of alternative investments in order to generate gains.
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Illiquidity
Most alternative investments are privately traded, and they are typically less liquid. Sometimes liquidity of these assets can go up to 12 years, and they could be difficult to liquidate. As a result, your cash could be tied up for a long time.
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AlFs are complex
Because of their complexity, these high-return short-term investments require comprehensive due diligence. Ensure you have conducted adequate research to understand the tax implications of the AIF investment you chose. For instance, hedge or private equity funds will be subject to different regulations than real estate investments.
Alternative investments outlook
The alternative investments market is expected to grow at 25% CAGR between 2022 and 2025, presenting investors with massive opportunities to generate high returns. The reason behind the segment’s growth is the lowering of entry criteria for mutual funds focusing on alternative investments. Additionally, investors have developed an appetite for alternatives and moved from conventional investments like ETFs and mutual funds.
Furthermore, there is a shift to an investment–oriented approach from the savings-focused approach as investors seek high-returns investments. In India, invoice discounting is currently among the most popular alternative investments because it promises above-market returns within a short time at low risk.
Are alternative investments worthy of adding to your portfolio?
Alternative investments allow investors to invest in assets not affected by market volatility common with conventional instruments. Investors that understand these instruments, such as KredX’s invoice discounting investment, can generate good returns within a short period.
However, it is important to understand that these investments tend to be illiquid, which means they are difficult to sell, and your money may be tied up for a long period. That’s why it’s essential that investors choose well-established partners like KredX. Nevertheless, the investments can help investors diversify their portfolios and hedge against currency inflation. Therefore, alternative investments are worthy because they can add value to the investor’s portfolio and open new opportunities.
If you are looking for alternative investments to diversify your portfolio and hedge against inflation, consider KredX’s invoice discounting investment. Ensure you understand the investment you are making and the process involved.
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