If we look at the world of investment, diversification is frequently perceived as a key component to mitigate risk and explore opportunities. For many years, stocks and bonds have traditionally been the most sought-after investing modules. However today, investors are gradually turning towards alternative assets to spread their wings and increase potential returns.
Let’s delve into these alternative assets that one can look into:
Real Estate
I. Direct Ownership
Real estate has and always been the most sought after investment option. Individuals can invest in commercial and residential properties for rental income and potential profit by purchasing it. WIth direct ownership, it can offer investors the control of the property coupled with the ability to use it as security for financing.
II. Real Estate Investment Trusts (REITs)
If one is looking out for a large-scale, income producing real estate, REITs have been one of the perfect mediums for individuals to invest in the real estate space. A company which focuses on owning and operating this high value income-producing real estate or related assets are termed as REIT. How to invest in REIT? REITs allow individual investors to earn a share which is being produced through commercial real estate ownership. Here, individuals don’t have to personally buy commercial real estate.
III. Real Estate Crowdfunding
This new concept enables investors to engage in real estate projects with lower initial capital contributions. Through online platforms, investors can have access to a wide range of projects, from residential buildings to commercial properties. This also enables spreading risk over many endeavors.
Commodities
I. Precious Metals
Looking forward to investing in another high value asset? Look no further than precious metals. One of the oldest and most credible ways of investing has been the procurement of precious metals. It brings a robust store of value and a vanguard against inflation. Here, gold, silver, platinum, and other precious metals can be physically kept or indulge in exchange-traded funds (ETFs) that track the price of these metals.
II. Agricultural Commodities
As India being an agriculture driven economy, investors can gain exposure to agricultural products like wheat, corn, and soybeans through futures contracts or commodity-focused ETFs. However, one should note that these investments are critically influenced by factors like weather conditions, global demand, and geopolitical events.
Private Equity
I. Venture Capital
With a great potential for substantial and rapid growth, venture capital (VC) is generally used to support startups and other businesses As VC firms raise money from limited partners (LPs) to invest in promising startups or even larger venture funds, this is a likely option for an alternative investment.
II. Private Equity Funds
Private equity funds pool capital from multiple investors to acquire or invest in established businesses. These funds often take a more active role in managing and growing the companies in their portfolio, aiming for higher returns compared to public market investments. However, this form of investment is limited to only individuals with high net worth.
Hedge Funds
Hedge funds employ various strategies, such as long-short equity, global macro, and event-driven, to generate returns. These funds are professionally managed by professional fund managers and often utilize leverage and derivatives to enhance performance. Hedge funds are typically open to accredited investors and may have higher fees compared to traditional investments. This fund spreads its horizon across debt and equity securities, commodities, currencies, derivatives, and real estate.
Cryptocurrencies
I. Bitcoin and Altcoins
Leveraging blockchain technology, cryptocurrencies have emerged as a future-driven new asset class, with Bitcoin leading paving the way forward. These digital currencies offer decentralization, security, and potential for substantial returns. However, one has to note that these assets are highly volatile but can provide diversification benefits in a well-balanced portfolio.
II. Blockchain Technology
Investing in blockchain-focused companies or projects leverages the underlying technology that powers cryptocurrencies. This includes applications in supply chain management, identity verification, and smart contracts.
Collectibles
Investing in tangible assets like art, vintage cars, rare coins, and other collectibles can provide aesthetic pleasure along with potential financial gain. The value of collectibles is often driven by scarcity, historical significance, and cultural relevance.
Now Let’s Delve Into Some of the Benefits and Risks That Individuals can Expect:
Benefits of Alternative Investments
Diversification: Alternative investments offer exposure to different market dynamics and can help spread risk across non-correlated assets.
Higher Returns: Although private equity and venture capital come with higher risk. These alternative investments have the potential for significant returns.
Inflation Hedge: Certain assets like real estate and commodities can act as a layer of protection against inflation which further preserves purchasing power.
Portfolio Customization: Investors can tailor their portfolios to suit their risk tolerance, investment horizon, and financial goals.
Risks of Alternative Investments
Illiquidity: Many alternative investments, such as real estate or private equity, may have longer holding periods and limited exit options.
Lack of Transparency: Compared to publicly traded stocks and bonds, some alternative investments may have less publicly available information.
Higher Risk and Volatility: Many alternative assets are subject to higher levels of risk and price volatility compared to traditional investments.
Regulatory Complexity: Certain alternative investments, like hedge funds and private equity, may involve complex regulatory considerations and may only be accessible to accredited investors.
Today, alternative investments provide investors a diverse range of alternatives to supplement their standard stock and bond holdings. They do, however, come with their own set of drawbacks and considerations. Before entering the world of alternative investments, it is critical to undertake extensive due research, assess risk tolerance, and consider getting financial professional assistance. Investors might possibly improve the resilience and performance of their portfolios in a variety of market scenarios by thoughtfully embracing alternative assets.
