Alternative investments: Championing transformation of the investment landscape
Most investors appear to have vivid memories of their investment during the financial crisis of 2008 and the subsequent Great Recession. A decade later, the Covid-19 outbreak, which wreaked havoc on global markets, not only reopened old wounds but also wreaked considerably greater havoc on the economy. The way investors reacted and modified their investing plan to shield their investments while pre-empting similar tragedies in the future is an interesting parallel between the two instances. While some panic and go on a selling spree in these unprecedented times, others see events like a market crash as an opportunity to move into newer areas of investing.
Another example: Bank FDs are often considered the safest and most popular risk-free investment option. On the other hand, the pandemic has forced investors to reconsider their investment strategy. According to RBI data, the average interest rate on bank FDs is 5.6 per cent, while inflation is now hovering around 6%. This means we’re losing 0.4 per cent of our annual revenue. As a result, investors must include high-return-oriented asset classes in their portfolios to achieve inflation-beating returns.
While alternative investments as a concept have existed since the dawn of time, they have expanded and evolved over time, earning significant importance during difficult periods such as the 2008 financial crisis or the pandemic. Long periods of low interest, insufficient profits, and market volatility, among other factors, have prompted investors to journey into these less-travelled areas again and time again. The rise of new-age alternative assets, which are increasingly becoming mainstream asset classes, has been fueled by technology and new-age digital platforms that provide improved access to specialised investment areas.
Challenges exercising setback
Alternative assets, unlike traditional assets, are typically owned by institutions and are not publicly traded. This is one of the reasons why HNIs, NRIs, and institutional investors, among others, have been denied access to these assets. They also lack liquidity and have exit time limitations, which means investors may not be able to exit them at a specific moment. Furthermore, appraisals may become problematic due to a lack of current and historical data in the public domain and the absence of an adequate market price.
New-age platforms driving the tech shift
The asset management industry is undergoing a significant transformation. New-age wealth platforms, with technology at their core and digitisation at their core, provide alternative assets without the usual bottlenecks. While these platforms may service markets worldwide, they are intensely focused on the market segment they choose to serve and hence offer highly specialised products that are acceptable and appealing to the market segment they serve.
As these platforms grow and expand, they devote more time and resources to growing their customer base to gain access to the private pool of capital. Additionally, they are aggressively expanding their product range to meet the needs of their consumers across their whole life cycle. Unlike traditional investment platforms, platforms offering alternative investment avenues with their tech-backed best practices empower users to make well-informed decisions while providing a world-class experience.
Global Equities: A well-diversified portfolio can help limit risks, according to the thumb rule of investing. Global stocks have become a sought-after asset class, thanks to platforms that allow investors to design a portfolio that spans multiple geographies. One of the primary advantages of the asset is that investments are significantly more insulated in the event of a flash crash or an economic collapse in a specific region because global firms are scattered across geographies.
As a result of the benefits of global diversity, investors are increasingly looking beyond local equity markets. However, global markets can be foreign in more ways than one, and it can be difficult for investors to comprehend market sentiment remotely all of the time, so it’s best to be cautious and test the waters first.
P2P Lending – New-age P2P platforms provide an automated and transparent platform where lenders and borrowers are connected directly, eliminating the high-cost intermediary, allowing lenders to earn more and borrowers to pay less – a win-win situation for both parties.
While these platforms provide reasonable interest rates ranging from 12 to 15%, they often come with the danger of defaults and poor loans. On the other hand, platforms are increasingly focusing on improving tech and diversifying products to reduce risks while raising returns. Furthermore, diversifying the portfolio across several borrowers spreads the risk, lessening the impact of a few borrowers’ default.
Fractional ownership in real estate – Commercial real estate is a steady, high-yielding asset. Still, it has always been restricted to HNIs, private equity companies, and family offices due to the large ticket size, lack of knowledge, data, and transparency, among other factors. CRE as an asset class is undergoing a major transformation thanks to new-age tech-backed platforms. They look at hundreds of properties and take into account dozens of variables to find the optimal balance of yield, stability, and value appreciation.
They allow investors to hold and sell fractions of pre-leased, Grade-A commercial buildings to receive rental income (passive income) of 10% to 14% while also benefiting from capital appreciation. However, having it as a long-term investment is the basic rule of effective fractional ownership investment. To see decent profits on a fractional ownership investment, you’ll need a maturity time of at least five years.
While residential properties have yields of roughly 2-3 per cent, bank FDs have yields of around 5-6 per cent. As a result, these platforms are transforming CRE into a popular asset class like never before by lowering capital requirements, bringing in expertise, enhancing liquidity, and providing the dual benefit of earning rental income and capital gain. Today, individual investors can choose from a wide range of assets, including office spaces, warehouses, and special economic zones (SEZs).
Cryptocurrencies – The year 2021 will be remembered as a turning point for cryptocurrencies. Apart from banks and corporations unveiling their own cryptocurrency ventures, the year saw institutional interest in Bitcoin skyrocket. Bitcoin, which is only a decade old, is suddenly being compared to traditional investment items like gold. Today’s investors are open to a variety of investment options, including dollar-cost averaging and systematic investment plans (SIPs).
Investors can SIP into various cryptocurrencies, including Bitcoin and Ethereum, through crypto exchanges. While cryptocurrency has experienced a lot of volatility, and while its value is now declining, this asset class has a bright future because of the burgeoning Blockchain technology and its rising ramifications.
Future of Alternative investments
With technology and digitisation bringing the world closer together, there has been a significant increase in novel investment outlets and opportunities. New-age wealth-tech platforms are championing a revolution of the traditional investing environment by providing quick access, transparency, and asset management solutions on the move — via an app or a user-friendly dashboard.
This, in turn, will have a cascading effect on traditional investing options. World-class asset management firms that specialise in ‘value investing’ will become more of a necessity than a luxury. As a result, new-age wealth platforms will need to devote a significant amount of time, energy, and money to developing tailored products and sharp strategies that will allow them to target certain customer cohorts and gain access to different wealth pools.