Types of Alternative Investments in India

Alternative investments refer to financial assets that do not fall into the conventional investment categories, such as stocks, bonds, or mutual funds. These investments are often used to diversify investment portfolios and reduce risk.

Traditional investment instruments like fixed deposits, provident funds, and stocks are typically the preferred choice of Indian investors. However, the popularity of alternative investments has been growing due to the potential for high returns.

Understanding Alternatives Investments

Many alternative investments are complex and come with higher risks, as well as less regulation compared to traditional investments. However, they can offer higher returns, though these are not guaranteed. 

Some alternative investment examples include:

• Private equity - investments in startups or companies that are not publicly traded

• Raw material investments such as in oil, gold, or other derivatives

• Tangible assets, such as collectables, art, metals, etc., can change as per the market value with time

Understanding Alternative Investment Options in India

Here are some types of alternative investment options in India.

1. Real Estate

Real estate is one of the most popular forms of alternative investments in India. This includes residential properties, commercial properties, and Real Estate Investment Trusts (REITs). Real estate could provide steady cash flow in the form of rent and potential appreciation over time.

2. Gold and Other Precious Metals

Alternative investments include precious metals like gold, silver, and platinum. They are often used as a hedge against inflation and currency fluctuations. In India, traditional and risk-averse investors prefer to invest in gold in the form of jewellery or coins. 

3. Art and Collectibles

Investing in art and collectables such as vintage cars, coins, stamps, and other rare items has gained popularity in India. These assets can appreciate over time and can be a good store of value.

4. Commodities 

Another way to invest money is by purchasing commodities. Commodities are raw materials or primary agricultural products, such as metals, natural gas, or agricultural produce, that are traded in markets. 

5. Farmland

You can either use the land for farming yourself or lease it to other farmers for rental income. However, investing in farmland requires significant capital and legal knowledge.

6. Cryptocurrency 

Cryptocurrency investments have gained popularity due to their potential for high returns. Cryptocurrencies are digital currencies stored on blockchain networks and the regulatory framework for the same is still evolving in India.

Benefits of Investing in Alternative Investments

Alternative investments can offer several benefits:

• Diversification

They can help diversify your portfolio as an alternative to traditional or popular investment avenues

• Potential for Higher Returns

Some options have the potential to provide higher returns, depending on the asset value

• Inflation Hedge

Certain types of investments in India, like real estate and commodities, can act as a hedge against inflation

• Lower Volatility

Unlike traditional or market-linked tools, these investments are often exposed to less volatility

Drawbacks of Opting for Alternative Investments

Before investing in alternative assets, it’s crucial to consider the following disadvantages:

1. Higher Risk: Alternative investments are often speculative, illiquid, and vulnerable to market fluctuations

2. Lack of Liquidity: Many investments, like real estate, are illiquid, making it challenging to access funds when needed

3. Complexity: Understanding alternative investments demands expertise and research, limiting accessibility for novice investors

4. Regulatory Oversight: Some alternative investments are not regulated, increasing the risk of fraud

How to Evaluate Risk in Alternative Investment Products

If you are opting for alternative investment products, you must be aware of the key factors that account for risk. To make sure that these products provide good returns while not getting losses, here are some methods:

• Risk and Liquidity Management

Alternative investment products, such as real estate, private equity, or commodities, often carry higher risks due to market fluctuations. Liquidity, which depends on market conditions, can vary. A solid liquidity management framework should be used to assess the market position.

• Leverage Overview 

Investors should monitor leverage metrics such as net leverage and long leverage to understand the total risk involved. This helps in adjusting and managing the investment portfolio effectively.

• Governance Structure

It’s crucial for investors to review government regulations and control mechanisms. A strong governance framework can help manage risk and maintain stability during periods of market volatility.