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Alternative assets can offer better returns. Should you invest in them?


Imagine having a meal in your favourite restaurant. You start with appetizers, then go to the main course and end the meal with some wonderful dessert. Now think of your investment portfolio as this meal. The appetizers are like investing in direct equities, your main course is akin to investing in mutual funds and think of your dessert as ‘alternative assets’.

Simply put, alternative assets are those that are not a part of traditional financial assets (fixed deposits, equity shares, equity and debt mutual funds) or traditional physical assets (real estate, physical gold). Alternative assets also form part of some asset class but with a twist. There are few other asset classes but they are very niche (like art) and hence not very relevant. It is also appropriate to exclude crypto assets due to the debate and controversy surrounding them.

Alternative assets can be classified into equity (private equity, unlisted equity, venture capital), debt (high yield bonds, market-linked debentures, green bonds, peer-to-peer lending, pass through certificates, invoice discounting), real estate (real estate investment trusts or Reits, infrastructure investment trusts or InvITs, fractional real estate), etc.

Alternative assets versus traditional assets

Till recently, only ultra high net worth investors (UHNI) and institutional investors had access to investing in these assets due to high ticket sizes. The rise of technology has now made these instruments accessible to all investors due to smaller-ticket size offerings. Most alternative assets, though theoretically tradeable, don’t have an active market. This makes it difficult to liquidate these assets when funds are required at a fair price.

Benefits of alternative assets

Alternative assets have the potential to give higher returns than traditional assets. Of course, these extra returns come at higher risk. Alternative assets typically have a lower co-relation with traditional assets. For e.g., high-yield bonds are not as susceptible to interest rate volatilities as traditional debt instruments.

Fixed deposits give stable and predictable returns but they don’t beat inflation, especially on a post-tax basis. High yield bonds have the potential to give yields of 10-12% and they beat inflation even on a post-tax basis.

Technology and fintech platforms have helped in ‘sachetization’ of alternative asset offerings. Investors can now invest in different assets at very low ticket sizes enabling them to spread their investments across more options. Options like fractional real estate and Reits help to invest in real estate at a much lower ticket size than directly investing in physical real estate. Similarly, one can invest in high yield corporate bonds beginning with just 10,000.

Alternative assets and their risks

There are some risks attached to alternative assets like market risk, credit risk, and liquidity risk. Alternative assets are not fully immune to market turmoil. A slowdown in the real estate market may impact the returns of Reits and InvITs. Similarly, a weak equity market will affect the unlisted and private equity assets. Diversification across different alternative and traditional assets help reduce this risk.

Credit risk refers to the risk that the issuer is not able to honour the principal and interest in a timely manner. To minimize this risk, an investor must do a thorough due diligence. As a screening criterion while investing in high yield bonds, investors can look at only investment grade (credit rating between AAA and BBB-) and secured bonds.

As mentioned earlier, liquidity should be a major consideration while investing in alternative assets. An investor must match the liquidity requirement with the maturity of the instrument. Alternatively, they can invest with platforms that provide liquidity even if that comes at some cost.

One should note that risk types vary among different types of alternative assets.

As with anything new, it is always wise to start slow in the beginning and get comfortable with the asset class before investing big sums.

Vijay Kuppa is chief executive officer of InCred Money

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Updated: 02 Nov 2023, 10:58 PM IST

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