Top Alternative Investing Avenues

• 26 May 2020 | 1173 Views | By

An alternative investment is a financial asset that does not fall into the conventional investment categories of equity, income, or cash. Such investments are unregulated by the SEC and tend to be only somewhat liquid. Given their complex nature and high degree of risk, most alternative investments are traditionally held by institutional investors or accredited or high net-worth individuals. Nonetheless, such investments have become feasible for retail investors via alt funds, ETFs, and specific mutual funds. Different alternative investment options may include Private Equity/ Venture Capital, hedge funds, managed futures, art and antiques, derivatives contracts, real estate/property, commodities, and other tangible assets.

Typically alternative investments have comparatively higher minimum investment criteria and fee structures associated with them. Transaction costs, however, are much lower for alternative investments than those of conventional assets largely due to low turnover. Alternative investments are difficult to advertise to potential investors as there are fewer proofs of verifiable performance. In simple words, investors are likely to find it more difficult to sell 100 bottles of premium aged wine than 100 shares of Apple Inc.

Alternative investments often move in the opposite direction of stock and bond markets. Thus, such avenues of investment are a good way of portfolio diversification. Investing in hard assets like gold, real estate, crude oil, etc. gives effective hedge against currency fluctuations during inflation.  When you think about alternative investments, you must be wary of scams and quick-wealth schemes. You should rather focus on legit investment tools that may help your finances prosper.

What are the best alternative investments?

Some of the best alternative investment options are as follows:

1. Peer-to-Peer Lending (P2P Lending)

It is an online service that offers loans to borrowers seeking funds for businesses and/or personal use. There are no banks involved in this type of transaction. You are pooled with a group of investors/lenders and each group together contributes to make a loan to an individual. In return, you will receive a payment with interest each month from the borrower. Often, the return from P2P lending tends to be higher than those from regular investment vehicles. 

The main risk with this option is that there are high chances of default as most lenders are typically those individuals who have been rejected a loan by banks/ other traditional means. Thus, you should decide the credit rating and other parameters before making the choice to lend to a peer.

Learn about Dawn of P2P Lending in India

2.Real Estate:

There are many ways of investing in property these days. First is the traditional way of buying a property individually, having tenants live there, and collecting rent. You get rental income while the property value appreciates over time. The rental income can be used to pay the home-loan EMIs or can act as your monthly (additional) income. However, being a landlord is a painful task. 

The second option is to partner with like-minded investors to buy and manage a property together. This helps in spreading the risk and establishing connections with knowledgeable people in the real estate industry. Another option is to use an online real-estate platform that allows you to invest in residential properties without the hassle of being a landlord. It is somewhat similar to hiring a property manager to handle the responsibilities of property ownership for some fees. In either case, be sure to access the risk and do your research before diving into real-estate investment.

3. Gold

People have been investing in gold for a long time now. It is widely regarded as a tangible asset to hedge against inflation, a highly liquid asset, and a long-term value-store. It is, thus, one of the most sought-after asset classes that gives strong competition to stocks. Gold also acts as a good diversification and rescue option because of its low correlation with other asset classes. There are many ways of investing in gold such as buying and holding gold coins or gold bars, gold exchange-traded funds (ETFs), gold accounts, gold mining stocks, futures and options, etc. Typically, setting aside 5-10% of your investment for gold is considered a healthy balance for your portfolio.

Know more about Battle of Luxury Investments: Comparing Gold and Real Estate

4. Own Businesses (Startups)

Investing in your own business can be tricky – you might see the highest returns compared to other options or lose a lot of money and grieve. It is, however, possible for your businesses to produce a steady income and growth over time. A smart way to do so is either to start a part-time/side business without losing your regular job or to put only a portion in the new business while investing the rest elsewhere to create a safety net.

5. Equity Crowd-funding

If you do not have your own business idea you may want to consider owning a part of someone else’s business. On the upside, if you invest in a company and the company succeeds, you will be rewarded. But on the downside, if the company fails there are chances you might lose all your money. You can invest in a company easily through an equity crowdfunding website.

6. Digital Currencies

Only a few years ago, one couldn’t avoid hearing news about Bitcoin. That, however, has leveled off and many other digital coins have appeared since then and have become a preferable alternative investment for many people. Although the market is highly volatile and there is quite a huge regulation in India, too many people have put substantial amounts of money into it. Digital currencies could yield a very high return rate but their popularity is yet to be reinforced with proper regulations in place.

The above listed options are good ways of building wealth if you are not ready or too risk-averse to invest and plunge into the stock market. If that is not the case, these options are still great tools to diversify your portfolios, elevate your retirement, and help protect you against economic downturns.

Another option for alternative investments are “Alternate Investment Funds” or AIFs. Under these funds capital from investors, primarily high net-worth individuals and institutions, is pooled to invest in asset classes such as real-estate, VC, private and public equity. As per SEBI guidelines, AIFs function in three categories: Category I AIFs invest in startups, SMEs, early-stage ventures, infrastructure projects, or other areas that seem economically desirable as per the government or regulators.

What is the Category 2 Alternative Investment Fund?

Category II AIFs are funds that are prohibited from raising any debt other than meeting daily requirements. Such assets may include real-estate funds, private equity, and distressed asset funds. Category III AIFs are aimed at short-term returns, for example – hedge funds and PIPE funds.

What is the Safest Investment?

Due to a vast variety of investment options available these days and the unpredictability of the economic climate, it is difficult to identify the safest investment option. In addition to traditional investment options, some alternate investment categories that are typically much safer than others. Certificate of Deposits (CDs), municipal bonds, and direct equity are such investment categories. CDs are issued when you lend money to a bank that then returns it to you with interest after a certain time period. Municipal bonds are issued when a government-body wants to raise funds for state/city/town projects such as roads, railways, airports, schools, etc. Municipal bonds are tax-exempt and yield high returns.

How can I build wealth without stocks?

While investing in stocks may not be everyone’s cup of tea, direct equity has been able to deliver high inflation-adjusted returns compared to other asset classes. To invest directly in equity one needs a Demat account.

While there are numerous avenues for investing your money into, you need to carefully research and find the most suitable option to park your idle funds. You should analyze your investment alternatives to understand their risk, return, term, convenience, liquidity, etc. Based on your needs and requirements, you could be a traditional investor, an alternate investor, or both – the idea, always, is to diversify your risks and consolidate your returns.