Are Alternative Assets a Good Investment?

Ashish M. Shaji

26 Aug, 2020

With the passage of time, people are becoming financially responsible and are making more financially sound decisions regarding investments. Retail investments have increased to some extent in the last few years.

 Most of the people have been investing in traditional assets like stocks and bonds, but in this article, we will discuss whether investing in alternative assets are beneficial.

What are Alternative Assets?

Alternative assets are an investment that does not conform to the traditional asset classes of stock, bond, or certificate. They may also provide tax benefits that are not available in traditional investments. Many alternative investments can prove to be a great addition in an investor portfolio.

 What are the advantages of Alternative Assets (AA)?

The advantages of AA are specified below:

• They can add an element of diversification that can help with high returns when bonds or stock prices go down as they are not affected by these markets.
• Some of these assets are able to perform during increased market volatility that helps in reducing risk.
• AAs can offer investors opportunities to capitalize on a hitherto untapped market or asset class, thereby allowing them to improve returns when equity returns are negative or low.

What are the risks with Alternative asset?

AAs come with their share of risks as well. These include the following:

• The risk with AAs is that they can be volatile compared to traditional investments such as mutual funds and bonds. Therefore the investors require better due diligence and have a deeper understanding of the assets they are investing in.
• They can be complicated to work with for some investors, especially since the traditional risk measurement methods do not apply to them.
•  Since these provide lower liquidity, AAs are often mispriced, which leads to arbitrage in case of untimely exits or distress sale.
• The AA class lacks liquidity and is seen as the most significant disadvantage since liquidating and getting a valuation done is time-consuming.
• The AA class investments are not traded publicly and are close end instruments; therefore, there is no secondary market for these products, and these have to be traded depending upon the buyer being available.

What are the best alternative assets?

The following AAs are some of the popular ones that you can get started with:

• Gold

One of the oldest Alternative investments in India is gold. It is mainly because Gold is an integral part of Indian culture. However, if we see it from an investor’s angle as well, it really is a good option. The main reason for investment in Gold is that it is a hedge against inflation. Hence even when there is a fall in stock markets, more often than not, gold does well. Another factor is that it is easy to convert gold into cash and can also be used to take personal loans. It is to be noted that before an investor invests in gold, he must be clear in his head that it is essentially an investment in a commodity, and his overall investment in commodities should be around 3% in his portfolio.

• Rare Old Coins

As we are known to the fact that India is one of the oldest countries in the world and is home to many civilizations. Therefore it has had its share of old and rare coins from the Mughal Empire^[1], Gupta empire, etc. One can invest in these coins and also in the Suvarna Mohur, Anna, etc. However, it may be noted that getting good returns in these anytime soon may not be possible. The numismatics market is still gradually emerging in India, and in the past few years, it has shown great and faster growth, and it is expected to be big enough in the next few years to fetch you some good returns. One can consider investing in rare coins if they are looking for long term gains. 

• Real Estate

In case a person wants to make big investments, then considering real estate would be a good option as an alternative investment. Finding a good property in a metropolitan city such as Pune, Bangalore or Delhi can help in fetching massive returns if one can wait for some years as the Indian realty market is expected to touch 1 trillion dollars by 2030 as per a leading publishing agency. Another factor that can motivate you to invest in real estate is that you can earn passive income by renting out the place.

• Venture Capitalism

We are in the age of new and innovative start-ups; therefore, it is not a bad option to consider becoming a venture capitalist for long term gains. This aspect involves funding start-ups that you think to possess a lot of potentials and have the capability of becoming large profitable businesses in the future. However, it is good to know that they are very risky reward investments, and one must be careful where he or she puts their hard-earned money as a lot of start-ups fail within the first few years.

Conclusion