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What are Alternative Investments and their Best Options

By Annapoorna

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Updated on: May 22nd, 2023

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9 min read

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Alternative investments are non-conventional investment options that can help you earn high returns. Investing your hard-earned money requires careful consideration and a lot of planning. Given so many investment options, choosing the best one can be intimidating. Moreover, the increasing popularity of alternative investments adds to the confusion. This article provides a simplified explanation of alternative investments and also walks you through the best alternative investment options to consider. 

What are Alternative Investments? 

Stocks, bonds, and cash are the main investment categories or traditional options. Recently, alternative investments are increasingly becoming popular. These are the types of investments that do not fall into the traditional investment categories. 

While these have been the go-to investment options for companies, alternative investment options are rapidly increasing in popularity. Alternative investments differ from traditional investments in complexity, liquidity, riskiness, regulations, and fund management system. These investment options offer better returns and an increased possibility of diversification. 

Alternative investments might include private equity, venture capital, hedge funds, real estate, collectibles, etc. 

Alternative investments are more complex and risky than traditional investments, but they also allow businesses to diversify their investment portfolio and build a solid financial base. These investments are appropriate for high-net-worth individuals and corporations. 

These funds are highly volatile and are affected by market volatility, making them very risky. This calls for active management of funds and constant reviewing of investment strategies. 

Importance of Alternative Investments 

Alternative investments are becoming increasingly popular among investors because they offer diversification benefits and the potential for higher returns than traditional investments. Here are the key reasons why alternative investments are important - 

  1. Diversification: Alternative investments allows businesses to diversify their portfolio and include investment in different asset classes, thereby, reducing the portfolio risk and over-investment in a single asset class. By investing in assets that are not correlated with the stock and bond markets, investors can spread their risk and potentially reduce portfolio volatility. 
  2. Potential for higher returns: Alternative investments, such as hedge funds, real estate, private equity, and commodities, often offer higher returns than traditional investments, such as stocks and bonds. However, these investments may also come with higher risks and may require more expertise and due diligence from investors.
  3. Inflation hedging: Alternative investments such as real estate, commodities, and infrastructure can provide a hedge against inflation, which can erode the value of conventional investments such as bonds. It can provide much higher returns to beat the inflation rate and thus help increase your overall wealth. 
  4. Access to unique opportunities: Alternative investments may provide access to unique investment opportunities that are not available in the public markets, such as venture capital investments in start-up companies or private equity investments in established businesses. These unique investment opportunities not only help reduce overall risk but also provides you with the opportunity to earn high returns. 
  5. Low correlation with traditional investments: Alternative investments often have a low correlation with traditional investments, which can help in reducing the overall risk of a portfolio and potentially increase returns. Correlation between stocks refers to the measure of how stocks move in relation to each other. These investments are not directly linked to the stock market and thus are not affected by market volatility, which reduces the overall risk. 

Overall, alternative investments can play an important role in a diversified investment portfolio, offering the potential for higher returns and reduced risk through exposure to different asset classes and investment strategies.

Options Available Under Alternative Investments 

Although there are many options available under alternative investments, there is no set formula for finding the best option for yourself. It all depends on your investment objective, risk tolerance, and investment strategy. Here are some common alternative investments:

  1. Private Equity: Private equity involves investing in private companies that are not listed on the stock market. Private equity investments can provide opportunities for high returns but often come with high risks and require a long-term investment horizon. These investments are the strategic acquisitions made by High Networth Individuals (HNWIs) by placing their funds in non-listed private entities. 
  2. Invoice discounting: Invoice Discounting is a process of leveraging unpaid invoices to get instant access to capital by offering discount to the buyer companies to exchange early payment of their dues. The payment is less than the actual invoice value and so called invoice discounting. The increased cash flow allows acceleration of higher growth. Businesses that commonly use invoice discounting are involved in manufacturing, construction, wholesale, transportation, and other related industries.
  3. Hedge Funds: Hedge funds are private investment funds that use a range of investment strategies to generate returns. These strategies can include long/short equity, arbitrage, and event-driven investing. Hedge funds can provide opportunities for high returns but often come with high fees and risks. These funds pool money from investors and invest in securities to earn higher returns and reduce the risk of loss. 
  4. Real Estate: Real estate investments can include direct ownership of properties, real estate investment trusts (REITs), and real estate crowdfunding platforms. Real estate investments can provide opportunities for income and capital appreciation, but often require a large upfront investment and can be illiquid. Also, real estate investments are not related to the equity markets and have a potential for high returns. 
  5. Commodities: Commodities include physical assets such as gold, silver, oil, and agricultural products. Commodities can provide a hedge against inflation and can offer opportunities for diversification. These investments act as a good hedge against market movements and currency fluctuations. 
  6. Asset Leasing: Another way of investing is to give your idle assets on lease. This is a great way to earn fixed monthly returns that are not linked to the market. This reduces the risk of loss and also helps in cash flow management. 
  7. Cryptocurrencies: Cryptocurrencies are digital assets that use blockchain technology. Cryptocurrencies can provide opportunities for high returns but often come with high volatility and risks.

With so many alternative investment options available, it's important to carefully evaluate each investment option and work with a financial advisor to determine which options may be appropriate for your individual goals and risk tolerance.

FAQs on Alternative investments

What are the common features of alternative investments?

Here are the four common features of alternative investments -

Lesser liquidity: Alternative investments are generally long-term investments that are relatively less liquid in nature as compared to traditional investments. 

Less regulation: Alternative investments or non-traditional investments are not as heavily regulated as traditional investments. 

Higher Returns: These investments present a potential for earning very high returns. 

Higher Risk: Along with high returns, these investments are also associated with higher risk. 

Are alternative investments safe?

Alternative investments carry very high risk and cannot be considered safe. However, these investments offer a brilliant opportunity to reduce the overall risk of the portfolio. 

About the Author

I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more

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