Alternative investments have been gaining traction alongside traditional options like fixed deposits (FDs), stocks, mutual funds, and gold. These non-traditional avenues encompass a range of opportunities, including hedge funds, private equity, commodities, real estate, venture capital, private debt placement, peer-to-peer lending, investing in start-ups, arts, antiques, vintage coins, stamps, and inventory financing.
Investors, particularly High Net Worth Individuals (HNIs), family offices, and affluent retirees, are increasingly exploring these alternatives to achieve passive and recurring income. However, these avenues have also become more accessible for small retail investors,
As a result, non-traditional investments soared to a substantial $13.7 trillion in assets during 2021. Looking ahead, industry experts project the cumulative value of these asset classes to surpass an impressive $23.3 trillion by the close of 2027. These remarkable statistics clearly demonstrate their expansion, as an increasing number of investors venture into this arena.
In this blog, we will delve into the top five alternative investment options in India, examining how they function, the associated risks, and the potential returns they can deliver.
Sovereign Gold Bonds (SGBs) are a unique investment avenue offered by the government. These bonds allow individuals to invest in gold without physically owning it. SGBs are backed by the government, making them a secure alternative investment option.
How It Works?
Sovereign Gold Bonds work on a straightforward principle. Investors purchase these bonds from recognised banks and financial institutions during specified subscription windows. The bonds have a fixed tenure, typically 8 years, but can be redeemed prematurely after the 5th year.
The minimum investment starts as low as one gram of gold, making it accessible to a wide range of investors. The bonds pay an annual interest rate on the initial investment amount, making them more attractive than physical gold ownership. Additionally, the bonds are tradable on the stock exchange, enhancing their liquidity.
Risks of Investing
SGB returns are twofold. Firstly, investors receive annual interest at a rate of 2.5% annually from the government. Secondly, the market price of gold can appreciate over time, potentially increasing the bond’s value. The cumulative returns depend on both these factors, making SGBs a unique combination of income and potential capital gains.
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Real Estate Investment Trusts (REITs) are a unique and accessible way to invest in real estate without the hassles of property ownership. These investment vehicles pool funds from multiple investors to purchase, manage, and sometimes develop a diversified portfolio of income-generating real estate assets. REITs are a compelling alternative investment option for those seeking both regular income and potential long-term capital appreciation.
How Do REITs Work?
REITs function like a collective investment. Investors buy shares of a REIT, which in turn owns and manages various real estate properties, such as office buildings, residential apartments, shopping centres, and more. The income generated from these properties, in the form of rent and lease payments, is distributed to shareholders as dividends. This regular income stream is one of the key attractions of REITs.
Benefits of Investing in REITs
Risks of Investing in REITs
REITs can provide competitive returns, which often combine both capital appreciation and regular income. The average historical annual return for REITs has been in the range of 8% to 12%. However, returns can vary based on the specific type of REIT and the performance of the real estate market.
You can also invest in REITs via mutual funds and ETFs which have primary holdings in REITs. Here, you have the benefits and safety of mutual funds and the returns of REITs. To, invest in RIETs mutual funds, you can open your demat account with Angel One now!
Asset leasing, often referred to as “equipment leasing,” is a financial arrangement where one party, known as the lessor, provides an asset (such as machinery, vehicles, or real estate) to another party, the lessee, in exchange for periodic payments. These agreements can take various forms, including operating leases and finance leases, each with its unique characteristics.
How It Works?
Asset leasing operates on a relatively simple premise. The lessor purchases an asset and leases it to the lessee for a specified period. During this period, the lessee pays regular lease payments, and at the end of the lease term, they may have the option to purchase the asset at a predetermined price. Asset leasing is prevalent in businesses where capital-intensive assets are essential but can become outdated or obsolete over time.
Benefits of Asset Leasing
Risks of Investing in Asset Leasing
The potential returns from asset leasing can vary widely depending on factors such as the type of asset, lease terms, and market conditions. One can expect a pre-tax IRR of up to 20%.
Peer-to-peer lending has emerged as a practical alternative to traditional bank loans. It offers borrowers the opportunity to secure loans directly from individual investors. In India, the P2P lending market is projected to reach a substantial $10.5 billion by 2025. Let’s delve into how peer-to-peer lending works, its benefits, potential risks, and returns for investors.
How Peer-to-Peer Lending Works?
Peer-to-peer lending operates on online platforms, connecting investors with borrowers while eliminating the need for banks or financial institutions. Investors can lend their money to borrowers in exchange for potential returns. These platforms charge fees and success fees on successful lending transactions, but the absence of intermediaries can mean better returns for both parties.
Benefits of Peer-to-Peer Lending
Risk Factors of Peer-to-Peer Lending
The potential returns from peer-to-peer lending can be enticing. Depending on the risk level of the loans in your portfolio, you can earn a return of 12 -14% per annum.
Invoice discounting is a financial practice where vendors, who have supplied goods or services, receive upfront cash for their outstanding invoices from investors. The underlying principle involves trading a future payment for immediate liquidity. Instead of waiting for the payment from their clients, vendors can access cash promptly by selling their receivables at a discounted rate to willing investors.
How Invoice Discounting Works?
Benefits of Invoice Discounting
Risks of Investing in Invoice Discounting
The potential returns in invoice discounting can be alluring, with pre-tax average annual returns reaching up to 15%. These returns are influenced by the terms of the invoice, the negotiated discount rate, and the reliability of the paying entity.
Alternative investments offer the potential for higher returns and diversification from traditional assets like stocks, bonds, and gold. They often come with additional credit protection and risk-adjusted returns.
However, it’s crucial to be aware of their risks. These investments may lack a substantial track record, carry credit risk, face liquidity challenges due to limited secondary markets, and lack regulatory oversight. Therefore, they shouldn’t replace bank fixed deposits or debt mutual funds. If you’re interested, consider limiting your exposure to no more than 10% of your fixed-income portfolio.
This article has been written for educational purposes only. The securities quoted are only examples and not recommendations.
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