For most conventional investors in India, the contours of a perfect portfolio are shaped solely by a healthy mix of stocks and mutual funds. After all, in a bullish market, it is these that promise to rake in the highest returns. But these aren’t the only two asset classes we have access to or can invest in.
Have you considered investing in alternative assets such as gold, art, stamps, coins? Any good financial manager will tell you how these help diversify your portfolio, and most importantly, shield you from turbulence in the market.
The idea is that once your base portfolio is built using traditional assets, you need to diversify it to provide some alternative exposure so that fluctuations in the equity or bond markets are partially offset by their performance.
Alternative options
When we talk of typical investment options, stocks, fixed income instruments, industrial or agri-commodities and currencies are some of the few that immediately come to mind. However, non-traditional assets such as real estate, precious metals and stones, art, antiques and collectibles such as carpets, shawls, coins, stamps and fine wines, among others, are a few investment options you can consider. These have a very low correlation to traditional assets, but promise handsome returns with prudent investment. Let’s look at it this way: Just like a house needs a good foundation, your portfolio, too, must have a healthy mix of large cap stocks, or diversified mutual funds, and a high-quality fixed income exposure.
The cost-benefit factor
Be aware that alternative assets can’t replace traditional investments. Instead, they are suitable only for those who want to diversify the risk in their portfolio once they already have a solid foundation in place. This is so because such vehicles are usually not related to traditional asset classes. For instance, in the event of a market crash, the price of a rare painting you own is unlikely to go down. This is so because it is expected to retain or appreciate in value over time because of its scarcity value.
Also, alternative investments in hard assets protect your portfolio against inflation when the purchasing power of paper money gets reduced. In times of high inflation, investments in gold and real estate can be good options to protect some part of a retail investor’s wealth against inflation.
Unlike pure financial assets such as share certificates or debentures, you can touch and enjoy a work of art or an antique carpet or tapestry. You can derive psychological income apart from just the prospect of capital appreciation.
The disadvantages
First, some alternative assets such as art, jewellery and antiques usually don’t generate any regular income, unlike, say, receiving dividends from stocks or interest from bonds. You can, of course, benefit from the appreciation of the value of your asset, but unless you actually cash out of it, this value exists only on paper.