BackLooking for alternative investment options
Looking for alternative investment options
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For the best part of this decade, equity has been the asset class of choice for most investors. The five-year bull run that took the benchmark index of the Bombay Stock Exchange up sevenfold also added to the craving for stock. But now, as a volatile market has taken more than a third off the Sensex’s all-time peak of 21,206.77 recorded in January, investors are looking for instruments that are secure and at the same time provide returns that beat inflation.
“Yes, times like these make one look at alternatives though asset allocation should be an all-weather friend," says Lovaii Navlakhi, managing director of International Money Matters, a wealth management firm.
The benefit of having a mixed basket, typically, is that it provides a buffer in times of downturn, where a dip in one asset is balanced by a rise in another. For instance, in the last few months, equity mutual funds would have given negative returns of 30-35%, but those from some international funds, which invest in stocks listed abroad, as well as gold funds, were positive.
However, most alternative assets require a large outlay, the reason investment advisers recommend investors consider them only once they have built up a primary portfolio of more than Rs1.5 crore. “The alternate asset classes are more suitable for high net worth individuals, considering the high-risk and high-return characteristics of some of these asset classes," says Samir Bimal, country head of private banking, ING Vysya Bank.
Therefore, the challenge for investors is to pick the assets that match individual risk profiles and to know how many such assets they need. “Even if you can come up with a dozen different categories of what you term as alternative, it is doubtful you need more than two or three in your portfolio, and even that may be too many," says Roger Nusbaum, a US-based investment adviser, in an article posted on Seekingalpha.com, a website that provides wealth management information.
In fact, informed investors have always sought out diversification. The World Wealth Report for Asia Pacific by Cap Gemini and Merrill Lynch indicates that even in the midst of the bull run, high net worth individuals in India were allocating nearly 20% of investable funds in alternative assets apart from real estate, which took 17%. “Efficient allocation is another important aspect of investments if investors want to ensure they maximize return on investment," says S. Naren, chief investment officer (equity), ICICI Prudential Asset Management Co.
Structured funds or capital protection funds
“That the product can be structured based on our views on the market, sectors and stocks is a big advantage," says Bimal of ING Vysya Bank. Most such products available are based on two models. In the constant proportion portfolio insurance model, the proportion of assets to be kept in stocks is decided by a multiplier, which is fixed. It means that if you invest Rs100, the multiplier can fix the debt portion at Rs78, with the balance in equity. This ratio will remain constant for the entire tenure, which is 18-30 months. In the dynamic portfolio insurance model, the multiplier is open to change and therefore, the proportion of assets also changes. The disadvantage with structured products: “If the fund fails to perform, money invested remains idle although there is no depreciation in capital," says Lovaii Navlakhi of International Money Matters.
International Funds
Art
Gold and other Commodities
Investment advisers are recommending a 10% allocation in portfolios for gold ETFs. “Gold is a safe investment as it can definitely beat inflation, with the only risk being an appreciating rupee," says Kanwar of ICICI Bank. He says the yellow metal is a great investment as it offers three different options—buying physical gold, investing in stocks of mining companies or in ETFs. Another option is to place money in natural resources such as coal, iron ore and metals—they offer good returns on investments with a three-to five-year horizon. The stocks of top natural resources firms are cheap, based on their earnings due to the perception that commodity prices go up and down at regular intervals, says Bimal of ING Vysya. However, the indicators of rising crude prices and inflation as well as a weakening dollar indicate a greater interest in gold for the time being.
Private Equity
“Private equity or early-stage investing is an option only for long-term investors who are not averse to higher risk and have the sustainability to remain invested for five years or more," says Waqar Naqvi, chief executive, Taurus Mutual Fund.
Real Estate
Over the past three years, a host of financial institutions have offered portfolio management options to high net worth clients, termed real estate portfolio management schemes or real estate venture funds, with a minimum investment requirement of Rs25 lakh. These schemes, registered with market regulator Securities and Exchange Board of India, are privately managed and invest in underdeveloped properties, where profits after development are shared by all investors. Typically, these are high-risk, high-return schemes where capital appreciation is the primary driver for investments.
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