When done properly, alternative assets can deliver high, inflation-beating and non-market-linked returns. However, as a new Investment Option, its risks are lesser known, which investors should evaluate before taking the plunge. Before investing you need to understand how it works and whether it suits you or not.
What are alternative investments?
alternative investment (AI) can be broadly described as any investment in asset classes that do not include stocks, bonds or cash. examples include p2p lendingRevenue-based financing, angel investments in startups and much more.
Like most new investment products, high net worth individuals are also early adopters in this segment and due to the increasing digitization and diversification trend of retail investment practices, options are making their way into portfolios of all sizes.
According to the Anand Rathi report, the total investment through alternative investment funds is expected to grow at a rate of 25% between 2022 and 2025. This growth will be driven by wealth managers providing alternative investment fund products to high net worth individuals, insurance. Firm and family office. The report specifically highlights that India, the rest of Asia and other emerging economies are poised for the next wave of alternative growth.
The report also shows that high net worth individuals, retail investors and wealth managers already contribute 5% or about $750 billion of the industry’s total AUM. This number will increase as regulatory changes and advances in technology lower the entry barriers for investors of all sizes.
AI Alternatives for Indian Investors
Options provide an opportunity to achieve the goal of superior risk-adjusted returns when combined with traditional assets. Subsequently, the inclusion of options in the portfolio expands to a variety of asset classes, further improving returns for investors.
Here are some examples of fast emerging alternative asset classes in India that investors can explore:
Revenue Based Financing (RBF)
In this alternative investment mechanism, you as an investor provide capital to a company or organization. In return you expect a return as a certain percentage of the company’s total gross revenue. Revenue-based financing, recently, has emerged as a lucrative way of raising capital by corporates and young startups. Traditional loans are not accessible to most startups until the company is broken up but capital is still needed for growth, which is why RBF is appropriate in these cases. Ecommerce/Direct to consumer startup brands are popular RBF consumers. You can choose one of the many online platforms available today to put aside the due diligence companies seeking RBF and connect them with investors who can invest up to Rs 50,000 per transaction.
According to a report by Allied Market Research, the worldwide revenue-based financing market accounted for $901.41 million in 2019. This number is projected to grow to $42.34 billion by 2027 with an expected CAGR of 61.8% from 2020 to 2027.
litigation financing
Litigation funding, also known as third-party funding (TPF), has become common in countries such as the United Kingdom, the United States, and Singapore. The popularity of litigation financing has grown to such an extent that TPF as an asset class has begun to outperform private equity and hedge funds. It refers to a loan given to a company (by investors like you) that is in the process of bankruptcy, in an effort to support them by providing them with the capital they need to remain operational.
TPF is relatively rare and not commonly heard of in India. It is a close form of ‘restructuring’ done by the big operators. New platforms are emerging that create sector-specific Special Purpose Vehicles (SPVs) for litigation funding, in which retail investors can participate in SPVs starting at Rs 10,000. SPVs then provide interim financing to insolvent companies so that they can stay afloat. These companies can also be MSMEs.
However, due to various recent legal developments, large conglomerates in the infrastructure and EPC sector have been entering into TPF arrangements with investment management companies in an attempt to tackle the problem of stressed assets and the ongoing high-value litigations that the sector has to offer. Known for the plague. whole. A fund is set up for TPF in which investors can participate. However, legally savvy investors usually do so. However, this option is only suitable for legally savvy investors.
peer-to-peer lending
Peer-to-peer (P2P) lending simply refers to a financial instrument that allows any individual investor to obtain loans directly from other individuals or investors without the need for an intermediary in the entire process. In formal financial systems, banks or other financial institutions act as intermediaries. P2P lending in India is regulated by RBI and only RBI approved platforms are allowed to operate. The regulated nature of P2P investments makes them relatively safe to invest in.
You can make P2P investments in ticket sizes starting from Rs 5,000 only up to the RBI-imposed limit of Rs 50 lakh. The biggest risk in the lending business is default by the borrowers. To reduce the risk of borrower defaults, lending platforms deploy data science and ground operations to manage portfolios.
fractional real estate as an alternative investment
With the structural changes being witnessed in the capital market, fractional real estate has the potential and characteristics of profit in the long run. Fractional real estate, in simple words, refers to a concept where like-minded investors come together to collectively own a commercial property. Hence, as an investor you become a partial owner or investor with a minimum investment requirement of Rs 20,000.
Fractional real estate divides the costly cost of purchasing the property into several fractions. It allows you to participate and invest in various assets. The fractional ownership market is expected to grow by 16% in the coming years. In addition, the industry in India is estimated to be valued at $5 billion in the next five years.
Evaluate your risk appetite and risk appetite before investing
Given the recent volatility and rising inflation in the market across the globe, you are likely to already feel the need to add fixed income investments to your portfolio.
Regulators in various countries are extending a helping hand by bringing in more clarity to deepen the financial markets and protect the interests of investors at the same time. After the 1990s, access to the stock market became a wealth driver for a large section of the population in India as well as the world. India today stands on the cusp of an equal but different opportunity, with the next wave of funding anticipated to be fueled by the growing prominence of alternative investments.
Understanding the return on investment, as an investor you should also consider the regulatory aspects of various alternative investments before investing your hard earned money. While some alternative assets are regulated, meaning that regulators oversee the entities that provide them, some are not. On the other hand, most traditional financial assets are regulated.
Furthermore, like all investment types, these also come with their own risk-reward profiles that you must understand.
(The author is the CEO and co-founder of IndiaP2P.com.)