Alternative Investment Management

Share (capital) and Bond (debt) are considered to be the main investing destinations. Other asset classes which also provide opportunity to grow money are categorised as Alternative Assets. They include investing options like real estate, precious metals, investments in private companies etc.

This article is a practical guide for personal finance learners who are curious about diversifying their portfolios with alternative assets. It will provide them with actionable advice on how to approach, assess, and manage these types of investments effectively.

Let’s discuss some practical aspects of using this asset class for wealth building.

Table of Contents

Reasons to Invest

Diversification

Alternative investments offer a way to diversify investment portfolios beyond traditional stocks, bonds, and cash. By including alternative assets in your portfolio, you can reduce your risk at portfolio level. If the stock market is going through correction, your investments in real estate or gold may generate returns to support your overall investment portfolio.

Potential for Higher Returns

Sometimes, these assets can grow in value much more than regular stocks or bonds. For example, if you have invested in real estate property and some infrastructure project like a major road is constructed nearby, then your property can generate a very high return within a short period.

Protection Against Inflation

Assets like real estate and gold often increase in value when general prices go up. This means they can protect your money from losing power over time.

Income Opportunities

Certain alternative assets, like rental properties, can give you regular income. This is helpful if you need a steady flow of money. This steady cash flow can support your regular expenses and you can focus on high return generating opportunities with a stress free mind. 

Identifying Your Options

Alternative investments include a variety of assets with different risk levels and return potentials. Here are some common alternative investment options.

Real Estate

This includes investing in land, commercial or residential properties. This can be done either directly by purchasing properties or indirectly through real estate investment trusts (REITs), real estate funds or Strata. Real estate can offer income through rent and potential for capital appreciation. Investing in land offers the highest potential returns. Residential properties, especially flats in apartment buildings are the least return generating option in real estate in India.

Precious Metals

Gold and silver are the most commonly used precious metals for investment purposes. Investors may purchase bullion (physical bricks), coins, or invest through financial instruments such as ETFs that represent physical backing by precious metals. Some investments also offer investing in digital gold and silver.

Private Company Debt

These could be bonds issued by private companies, or they could be more complex debt structures like distressed debt (NPA loan accounts). Investing in distressed debt involves buying the bonds or bank loans of troubled companies at a discount.

Cryptocurrencies and Tokens

Investing in Digital or virtual currencies  that use cryptography for security. Popular cryptocurrencies include Bitcoin and Ethereum. These are potentially high-return generating assets but the cryptocurrency market is also highly volatile.

Read About: Crypto Investing in India

Agricultural Land

Investments in agricultural land can provide returns through the sale of wood, agricultural products, or appreciation of the land. This type of investment offers tax free return. 

Infrastructure

Involves investing in infrastructure projects such as roads, bridges, water treatment facilities, wind farms, and solar parks etc. Retail investors can also invest in these high capital projects through Infrastructure investment trusts (InvITs) and get the future revenues generated by these. 

Private Equity

This involves investing in companies that are not publicly traded on stock exchanges. Private equity investments are typically made through private equity funds or venture capital firms. The aim of such investments is to generate returns through the eventual sale or public offering (IPO) of the companies.

Hedge Funds

Hedge funds are pooled investment funds that use different strategies to earn active returns for their investors. They might invest in public equities, bonds, commodities, currencies, derivatives, and other funds. Hedge funds are known for their aggressive investment strategies to generate very high returns.

Collectibles

These include items such as luxury watches, art, antiques, coins, stamps, vintage cars, and wine. The value of collectibles can appreciate over time which makes them a potential investment option. However, the market for collectibles can be highly speculative. The value of a collectible is influenced by factors such as rarity, condition, and market demand.

We will discuss each of the above asset classes in future to understand how we can use these to increase our net worth. 

Evaluating Alternative Assets

Alternative assets may have very specific risks and opportunities compared to traditional investments. Here are some key criteria to consider when assessing alternative assets.

Risk Assessment

Volatility: Market value of Alternative assets can fluctuate differently. For example, cryptocurrencies are known for high volatility, while real estate typically experiences more stable pricing.

Market Risk: Understand the factors that can affect the entire market in which the asset exists, such as economic downturns or regulatory changes. Some alternative assets may be new to the market and with very few legal requirements attached to them. But as they become more acceptable to public, government may enforce stricter rules for them.

Liquidity Risk: Many alternative assets, like real estate or collectibles, are not as liquid as stocks or bonds. This means they can be harder to sell quickly at a desired price. 

Counterparty Risk: In investments like private equity, the risk associated with the counterparty’s ability to meet the contract terms need to be assessed.

Return Potential

Historical Performance: Look at past performance data to gauge potential future returns, though past performance is not always indicative of future results. Look for something that can help the asset to continue to do well in future. Evaluate the asset’s potential for appreciation in value over time.

Income Generation: Regular income may be your reason for investing in a particular asset class. In that case, find out the factors that can harm the ability of an asset to continue to generate regular income. Prepare a plan for such situations. 

Diversification Impact

Correlation to Traditional Assets: One of the main benefits of alternative assets is their potential low correlation with traditional stock and bond markets. Confirm that the price of the alternative asset is not rising and falling with traditional asset classes.

Portfolio Balance: Assess how the addition of the alternative asset impacts the overall risk-return profile of your investment portfolio. Limit the investing amount upto the risk you decide to take.

Time Horizon and Capital Commitment

Investment Period: Many alternative investments require a longer commitment period, which can lock up capital for several years.

Exit Strategies: Understand the potential exit strategies and their feasibility, as well as any conditions or penalties associated with early withdrawal or sale. For example, exit from crypto in India is taxed at a very high rate.

Tax Implications

Tax Efficiency: Consider the tax implications of the investment, as some may offer tax benefits, while others could incur higher taxes.

Tax Complexity: Some alternative investments can complicate your tax situation, requiring more detailed tax planning and potentially higher costs for tax preparation.

Regulatory and Legal Considerations

Compliance Requirements: Ensure that the investment complies with relevant laws and regulations. It should not be declared illegal in the country.

Legal Structure: Understand the legal structure of the investment vehicle (e.g., limited partnerships, trusts) and your rights within that structure.

Managerial Expertise and Track Record

Management Team: Assess the experience and track record of the management team or fund manager handling the alternative investment. There should not be any negative news like court cases, fraud investigations etc that questions their integrity.

Operational Stability: Consider the operational setup of the managing entity, including their investment process, transparency, and governance standards.

Market Timing and Economic Factors

Entry and exit decisions must consider the prevalent market conditions and economic indicators.

Market Conditions:  Market conditions can affect the valuation and performance of alternative assets. Don’t buy something which is very expensive if you are going to hold it for a long period.

Economic Indicators: Broader economic factors, including interest rates, inflation, and economic growth projections, can influence the performance of alternative assets.

Minimum Investment: Many alternative investments have high minimum investment requirements. Investing a large part of your investment portfolio may expose the portfolio to an undesired level of risk.

Environmental, Social, and Governance (ESG) Factors

ESG factors are also important for some investors. For example, investments like social venture funds focus on generating social impact alongside financial returns. 

These criteria can help investors to conduct a comprehensive evaluation of alternative assets, ensuring a better understanding of the potential benefits and risks associated with their investment choices.

Getting Started

Understand Basics of Alternative Investing Management

Investing in alternative assets begins with thorough initial research to educate yourself about the various asset classes. This involves understanding the characteristics, risks, and potential returns of investments such as real estate, private equity, commodities, and more. Resources like financial news sites, investment blogs, and educational webinars can be useful. 

Small Scale Testing

Once you have a basic understanding, it’s wise to start with small-scale testing. This means making manageable investments that allow you to experience the market dynamics without overwhelming exposure. For example, investing a small amount in a crowdfunded real estate project or buying a fractional share in fine art. 

Using Specialised Platforms

Additionally, leveraging specialised platforms can significantly simplify your entry into these less accessible markets. These platforms are designed in a user-friendly way so that one can invest in specific alternative assets in a secure environment. They often come with added benefits like detailed analytics, expert advice, and regulatory compliance, making them an excellent tool for both new and experienced investors looking to include alternative assets into their investments portfolio.

Monitoring and Adjusting

Regular Reviews

Monitoring and adjusting alternative investments is a dynamic process that requires regular review and strategic decision-making to align with your long-term financial goals. It is advisable to conduct performance assessments of your alternative investments periodically—typically on a quarterly or semi-annual basis—to ensure they are performing as expected and to determine if any adjustments are needed based on current market conditions and future outlooks. 

Periodic Adjustments

Responding to market changes is crucial; investors need to decide whether to hold, sell, or buy more of an asset based on its current performance and projected future trends. For instance, if an investment significantly outperforms expectations due to favourable market conditions, it might be wise to sell a portion to realise gains or possibly buy more if the outlook remains positive. 

Portfolio Fit

Finally, it is essential to ensure that these investments are in line with your broader financial goals. Whether you’re aiming for wealth accumulation, retirement preparation, or generating passive income, each investment should play a specific role in your financial strategy, helping you build a robust and diversified portfolio that meets your long-term objectives.

Closing Remarks

Each alternative investment option comes with its own set of risks and benefits. Investors should carefully consider their own investment objectives and risk tolerance before investing in alternative investments. Additionally, many alternative investments require very high minimum investments ( >1 crore ). Alternative investments need longer holding periods. These investments are less liquid than traditional investments like stocks and bonds. They also need more research and tracking /watching than traditional assets. These assets are not suitable for new or part time investors. Only seasoned investors should get into alternative asset investing after building their core portfolios in traditional investments.

Scroll to Top