Most investors were earlier only limited to stocks, bonds and mutual funds as tools to make money work for them. Real estate, asset leasing, precious metals or any other form of alternative investments were only held by Ultra-HNIs as they required a very large investment. Since the rise of online trading and cryptocurrency, the domain of non-traditional investments is becoming more accessible and affordable.
These are called Alternative Investments and they offer several advantages over conventional investments. They can help you:
- Achieve higher returns by tapping into new sources of growth and income
- Reduce risk by diversifying your portfolio across different sectors and markets
- Protect your wealth from inflation and market volatility
- Access new opportunities and innovations that are not yet available in the public markets
According to a recent Cerulli Associates poll, asset managers raised their investments in non-traditional assets by nearly 5% over the previous year in order to diversify their portfolios and limit risk.
However, alternative investments also come with some challenges and risks. They can be:
- Illiquid and hard to sell quickly
- Expensive and complex to buy and manage
- Subject to less regulation and transparency
- Difficult to value and measure performance
Here are five popular alternative investment options that you should know about.
5 Alternative Investment Options You Can Consider
#1 Asset Leasing
With this investment option, retail investors can lease assets to big corporations/companies which does two things:
– For companies – It helps them expand their business and help in operations. Moreover, it allows them to avoid the hefty upfront costs of owning assets.
– For investors: It gives them access to recurring income in the form of returns during the tenure of the lease. These are medium to long-term options and are worth considering for investors that are looking to generate passive income.
Asset leasing can be a lucrative alternative investment because it offers the following:
- Stable and predictable income from the lease payments
- Direct or indirect ownership and control of the asset
- Protection from stock market fluctuations and inflation
- Higher returns than traditional fixed income options like FDs
In-depth due diligence should be done on the asset, the lessee, and the lease agreement before you participate in asset leasing. There are platforms like Grip that helps investors #GoBeyond inflation, volatility & low returns and provides investors the opportunity to invest in lucrative alternative investment opportunities like asset leasing.
#2 Corporate Bonds
Corporate bonds are debt instruments that businesses issue to raise money. Until the bonds mature, they pay the bondholders an interest rate that is fixed (coupon). Bondholders receive their principal returned at maturity.
Corporate bonds can be a good alternative investment because they offer the following:
- Higher returns than government bonds or bank deposits
- Regular income from the coupon payments
- Priority over equity holders in case of bankruptcy or liquidation
- Access to a large and diverse market of issuers
However, corporate bonds also carry some risks and challenges. They are:
- Subject to credit risk or default risk by the issuer
- Sensitive to interest rate changes and market conditions
- Prone to liquidity risk or difficulty in finding buyers or sellers
- Exposed to currency risk or exchange rate fluctuations if denominated in foreign currencies
One should research the issuer’s credit standing and financial stability before investing in corporate bonds. To lower your risk, diversify your portfolio across several industries, maturities, and currencies.
#3 Invoice Discounting
Purchasing invoices from companies at a discount and then collecting the full amount from their clients is the short-term financing method known as invoice discounting. Your profit is the sum of the invoice amount less the reduced price.
Invoice discounting can be an attractive alternative investment because it offers the following:
- High returns in a short period of time
- Low risk as invoices are backed by goods or services delivered
- Scalability as invoices can be bought in small or large quantities
However, invoice discounting also involves some risks and challenges. You have to:
- Verify the authenticity and validity of the invoices
- Ensure the timely collection and payment of the invoices
- Comply with the legal and regulatory norms
Therefore, before you invest in invoice discounting, you should do a careful screening and analysis of the invoices, the businesses, and their customers. You should also use a reliable platform or service provider that can facilitate the invoice discounting process and mitigate the risks.
#4 Startup Equity
Startup equity is a form of ownership in a new or emerging business that has high growth potential. Startup equity can be acquired through various ways, such as angel investing, venture capital, crowdfunding, employee stock options or investing in startup equity options available on platforms like Grip.
- Startup equity can be a rewarding alternative investment because it offers the following:
- High returns if the startup succeeds and goes public or gets acquired
- Equity appreciation as the startup grows and increases its valuation
- Participation in the innovation and disruption of various sectors and markets
- Social impact by supporting entrepreneurs and their vision
However, startup equity also carries high risks and challenges. They are:
- Highly speculative and uncertain as most startups fail or underperform
- Illiquid and long-term as startups take time to mature and exit
- Dilutive and volatile as startups raise multiple rounds of funding and face competition
- Complex and costly as startups require legal, financial, and operational due diligence
You should thoroughly investigate and assess the company, its team, its product, its market, and its traction before investing in startup equity. To lower your risk, you should diversify your portfolio across several phases, industries, and regions.
#5 Real Estate
Real estate is a dynamic and fascinating industry with several investment options. There are several compelling reasons why commercial real estate should be considered as a potential alternative investment. Commercial real estate or commercial property can be a profitable alternative investment because it offers the following:
- Steady income from rents or leases
- Capital appreciation from property value appreciation
- Tax benefits from depreciation and deductions
- Hedge against inflation and market volatility
However, commercial real estate also entails some risks and challenges. They are:
- Capital intensive and illiquid as properties are expensive and hard to sell
- Maintenance is intensive and costly as properties require upkeep and repairs
- Subject to market cycles and demand fluctuations
- Affected by environmental, social, and governance factors
To mitigate some of the risks and challenges associated with investing in real-estate, you can consider investing in listed REITs or fractional real-estate platforms that allow you to invest in small ticket sizes and diversify your investment, while taking care of all the operational aspects of managing the real-estate.
Alternatives offer a new way to make more from your hard-earned cash. These 5 alternatives can help you get started.