It is important to fund all your financial goals through other instruments before venturing into alternatives
Rahul Jain, 40, a Mumbai-based consultant, started to think about alternative investments after the 2008 financial crisis hit his equity portfolio. Now, Jain invests in global equities and fractional investments in real estate, which allows you to have part ownership in high-value properties like commercial buildings, to diversify his portfolio. “If one or two of the assets perform well, the average return stays stable or goes up even in a market downturn," he said.
According to Viram Shah, CEO and co-founder, Vested Finance, a platform that enables Indians to invest in the US stock markets, there has been a spike in investments in global equities since the covid-19 pandemic hit. “In the quarter ended June 2020, Vested received $5 million in deposits, up 50% from the previous quarter. Investors are seeing the importance of geographical diversification as the US markets have outperformed local markets. Also, with additional time available to investors now, they can research alternative investment avenues," he said.
Spike in interest
Alternative investments or asset classes include non-traditional investment avenues such as global equities, sovereign gold bonds (SGBs), real estate investment trusts (REITs), cryptocurrency and fractional real estate. In REITs, the fund manager deploys the investment in realty and there is no ownership, fractional ownership means you would partially own the property in question.
“People are realizing the importance of diversifying and are adding new investment avenues. For instance, with the Supreme Court overturning the Reserve Bank of India’s (RBI) banking ban circular, many new users are trying out cryptocurrency," said Sumit Gupta, CEO and co-founder, CoinDCX, a cryptocurrency trading platform.
The uncertainty across asset classes is driving investors to look for non-volatile investments that have less correlation to the stock market, so that they can be cushioned from market shocks, said Sudarshan Lodha, co-founder, Strata, a commercial real estate investment platform.
Who are they meant for?
According to Shobhit Mathur, senior director, Kotak Investment Advisors Ltd, which provides investment advisory services to high net-worth individuals (HNIs), alternative investments have found favour with HNI investors, especially REITs and private equity and startup investments. “However, retail investors are also keenly looking at alternative investments such as SGBs or REITs as these are listed instruments and offer returns in the form of interest or dividend and also help generate capital gains," he said.
Alternative options like private equity, cryptocurrency, collectibles and structured investments are only suited for evolved investors who have a surplus left over after meeting their financial goals and have the risk appetite for them.
Rishad Manekia, founder and managing director, Kairos Capital, a wealth management firm, said that alternative investments are not suitable for most investors. “An investor should ensure that he has sufficient funds kept aside separately for emergencies, as well as have a sufficient corpus or be on the path to accumulate enough funds for other goals like retirement, children’s education and buying a house. Once all these goals are properly planned for, they can consider alternatives," he said. They should also be aware that some of these, like cryptocurrency, are untested and, therefore, it is possible for investors to lose their entire investment, Manekia added.
Perhaps the most important factor to decide whether an alternative investment avenue is suitable for you, is how well you understand it.
Rakesh Rathode, 45, a Mumbai-based chartered accountant, has branched out into alternative investments over the last few years. “I started with traditional investments like mutual funds and fixed deposits but it has been a logical progression. As your risk appetite grows, you can slowly branch out," he said. Rathode primarily invests in US equities among alternatives as he wants a dollar component in his portfolio to fund expenses like children’s education abroad.
Being a CA, Rathode researched and learnt about the regulations surrounding investing in US equities. He also has an academic interest in learning about new investment avenues. But if you don’t have the time or the ability to research extensively, it’s best to steer clear of alternative investments.
“One needs to understand the product and the risks completely. Lay investors will be better off seeking the help of a professional, as the suitability of each investment depends on their needs and risk profile. If they invest without understanding the underlying risks, then there can be negative surprises," said Mathur.
Should you invest?
Amit Kukreja, registered investment adviser and founder, amitkukreja.com, always advises against alternative investments even if his clients show interest. “Most alternative investments don’t operate in regulated environments. So if the platform you are using to invest suddenly shuts shop, or the broker runs off, you will end up losing your money and there will be no one to turn to," he said, referring to cryptocurrency and fractional real estate.
While global equities are regulated, other options like cryptocurrency are not. “Cryptocurrencies are not suitable for most investors, as they are highly speculative in nature and untested over longer periods," said Manekia. He added that while fractional real estate ownership has its merits, investors looking to invest in a commercial property would be better off opting for publicly traded REITs since these are listed on the public markets, are liquid and have the benefit of diversification because they invest in multiple properties.
If you have money to spare after taking care of all your financial goals, you may consider looking at some alternative investments. But choose the ones that are well-regulated. Seek the help of an adviser if you don’t understand them.