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Top 5 Alternative Investment Options in India

13 October 20236 mins read by Angel One
This World Investor Week, explore top alternative investments in India: sovereign gold bonds, REITs, peer-to-peer lending, asset leasing, and invoice discounting. Diversify for potential higher returns and portfolio resilience.
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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,

  • One of the key attractions is the potential for higher returns, often ranging from 11-13%, a significant leap compared to the 5-7% returns offered by traditional debt products. 
  • Furthermore, these alternative investments often operate independently of stock or bond markets, allowing for enhanced portfolio diversification beyond conventional market-linked products.

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.

Top 5 Alternative Investment Options in India

1. Sovereign Gold Bonds

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.

Benefits

  1. Safety and Security: Being issued by the government, SGBs offer a high level of safety and security.
  2. Regular Income: Investors receive fixed interest payments, boosting their income.
  3. Capital Appreciation: As the bond’s value is linked to the market price of gold, investors can benefit from potential increases in gold prices.
  4. Tax Efficiency: Interest income and capital gains on SGBs are tax-efficient, especially when held till maturity.
  5. No Making Charges or Storage Worries: Unlike physical gold, there are no making charges, and storage is not a concern.

Risks of Investing

  1. Interest Rate Risk: Fluctuations in interest rates can affect the attractiveness of SGBs compared to other fixed-income investments.
  2. Liquidity Risk: If you need to sell your SGBs before maturity, market conditions may impact the ease of doing so.
  3. Lock-in Period: Although SGBs can be redeemed prematurely after the 5th year, investors should be aware of the lock-in period.
  4. Limited Availability: SGBs are issued in limited tranches, which can make it challenging to invest if you miss the subscription window.

Potential Returns

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.

Invest in SGB with the Angel One app in just 5 minutes. Open your demat account today.

2. REITs (Real Estate Investment Trusts)

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

  1. Diversification: REITs offer diversification as they typically invest in a variety of properties. This spreads risk across different real estate sectors and geographic locations.
  2. Liquidity: Unlike direct property ownership, REIT shares can be easily bought and sold on stock exchanges, providing liquidity to investors.
  3. Regular Income: REITs are mandated to distribute a significant portion of their income as dividends, making them an attractive option for income-seeking investors.
  4. Professional Management: REITs are managed by real estate professionals who make investment decisions, manage properties, and handle day-to-day operations.
  5. Tax Advantages: REITs enjoy certain tax benefits, such as not paying corporate income tax if they distribute at least 90% of their taxable income as dividends.

Risks of Investing in REITs

  1. Market Risk: Like all investments, REITs are subject to market fluctuations. The value of your investment can go up or down based on real estate market conditions.
  2. Interest Rate Sensitivity: REITs can be sensitive to changes in interest rates. Rising rates may affect the cost of borrowing and, in turn, impact the profitability of the properties.
  3. Property Market Risk: The performance of REITs depends on the health of the underlying real estate market. Economic downturns can lead to reduced occupancy rates and declining property values.
  4. Lack of Control: When you invest in a REIT, you relinquish control over the management and decision-making processes, which are in the hands of the REIT’s management team.

Potential Returns

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!

3. Asset Leasing

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

  1. Conservation of Capital: Asset leasing allows businesses to acquire necessary equipment without tying up substantial capital in one upfront purchase. This helps free up cash for other operational needs.
  2. Flexibility: Leasing arrangements can be tailored to suit the lessee’s specific needs, including lease terms, payment structures, and end-of-lease options.
  3. Tax Benefits: In many cases, lease payments are tax-deductible as an operating expense, providing potential tax advantages for lessees.

Risks of Investing in Asset Leasing

  1. Credit Risk: Lessors face the risk of lessees defaulting on their lease payments, potentially resulting in financial losses.
  2. Market Risk: The value of leased assets can fluctuate due to changes in market conditions, which can impact the lessor’s returns.
  3. Legal and Regulatory Risks: Lease agreements are subject to legal and regulatory frameworks that may change over time, affecting the lessor’s rights and obligations.
  4. Operational Risks: Maintenance, insurance, and other operational factors can impact the profitability of asset leasing.

Potential Returns

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%.

4. Peer-to-Peer Lending

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

  1. Variable Interest Rates: P2P lending offers varying interest rates, depending on the loan amount and the associated risk. This flexibility can be attractive to both borrowers and investors.
  2. High Returns: Investors stand to gain attractive returns on their investments. By cutting out traditional banks, P2P lending often allows for more significant returns, making it a lucrative choice.
  3. Convenience: The entire process, from loan application to investment, takes place in an online environment. This makes it quick and convenient, with minimal paperwork and hassle.

Risk Factors of Peer-to-Peer Lending

  1. Credit Risk: One of the key risks is the potential for borrowers to default on their loans, leading to financial losses for investors. P2P lending platforms usually categorise borrowers based on their creditworthiness to mitigate this risk.
  2. Lack of Liquidity: Unlike traditional investments, P2P lending investments are not easily tradable. Once your money is invested, it’s generally locked in until the end of the loan term.
  3. Regulatory Changes: Changes in financial regulations can impact the P2P lending industry. Investors should stay informed about any evolving regulations that might affect their investments.

Potential Returns

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.

5. Invoice Discounting

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?

  • Certain platforms facilitate the connection between vendors seeking early payments and investors looking for short-term investment opportunities.
  • Given that invoices can often run into significant sums, these platforms break them down into manageable fractions. This allows investors to purchase a portion of the outstanding invoice amount. The minimum investment amount varies from one deal to another, sometimes starting as low as ₹50,000.
  • Invoice discounting opportunities typically have short tenures, ranging from 30 to 90 days. This means that investors can access their returns relatively quickly.

Benefits of Invoice Discounting

  1. Liquidity: Vendors can maintain healthy cash flows by receiving upfront payments, which can be crucial for their business operations.
  2. Diversification: Investors can diversify their portfolio by venturing into an alternative investment that isn’t closely tied to traditional financial markets.
  3. Short-term Commitment: The short tenure of invoice discounting opportunities allows for quick capital turnover and provides flexibility for investors.
  4. No Banking Intermediary: Invoice discounting platforms eliminate the need for traditional banking connections, making the process more efficient and accessible.

Risks of Investing in Invoice Discounting

  1. Payment Delays: If the paying entity fails to make timely payments, it can negatively affect returns.
  2. Delivery Issues: Problems in the delivery of goods or services can lead to disputes and delays in payments.
  3. Legal Troubles: Legal issues involving the vendor or the paying entity can complicate the payment process.
  4. Credibility Assessment: To mitigate these risks, invoice discounting platforms conduct due diligence. They verify the authenticity of the raised invoice, assess the payment history of the entity, and may even seek post-dated cheques or personal guarantees from the promoter.

Potential Returns

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.

Conclusion

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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