Why Investors Are Opting for Alternative Investments?
As India continues to grow in leaps and bounds, investors have started to look out for options beyond traditional investments to support their growth trajectory. This is probably the primary reason why Alternative Investment Funds (AIF) have gained traction in the country.
While alternative investment isn’t a new concept, it is slowly gaining momentum and popularity among investors. In fact, with the rising interest rate, and the market showing signs of fatigue, investors are finding AIFs as an excellent way to diversify their portfolios. It provides higher returns, along with some level of investment protection.
Alternative investments can be utilized to enhance diversification and reduce volatility in a portfolio because they often don’t correlate to the stock market. Some may also provide tax advantages not found in conventional investing.
Although not guaranteed, like with any investment, the rate of return on alternatives could be higher than on conventional ones.
Individual investors now have access to sophisticated investments and potentially higher returns, which were previously exclusively available to institutions like pension funds and foundations, claim proponents of alternatives in the portfolios of individual investors.
Since alternative investments are usually not associated with traditional investment instruments, they are considered as good hedges against inflation. Considering the fact that AIFs were launched in 2012; the sector has mushroomed into a $25 billion industry, consisting of more than 500 registered funds. The fact is that AIFs provide an excellent opportunity to boost and diversify a portfolio. In light of this, here are five reasons why investors are increasingly investing in AIFs.
Diversifies Your Portfolio
Once used by large institutions and endowments, alternative investments have rapidly turned mainstream in the past couple of years. Since they are an excellent way to enhance portfolio security, alternative investments are gaining popularity among investors. A diversified portfolio aims at providing high returns at low risk by investing in a wide array of assets that would respond differently to the same market events.
AIFs come with a low correlation to conventional asset classes like bonds, stocks, gold, and more. As such, adding them to the investment portfolio can lessen the volatility factor without losing on return. Diversification is one of the key reasons why some types of institutional investors (including pension plans, endowments, or foundations) invest in alternative assets.
Diminishes Portfolio Volatility
Investing in conventional modes of securities implies that investors can focus on absolute return without any significant risk of volatility. Adding alternative investment with no interrelation and high returns significantly reduce risk. It helps reduce the hazard associated with market fluctuations and other unfortunate economic events. By doing so, an investor can minimize volatility levels, ultimately enabling a safe and stable investment portfolio.
Throughout history, the potential profits provided by alternatives have attracted investors. Alternative assets have the potential to generate substantially larger returns than their conventional counterparts, yet results cannot be guaranteed.
There are many different ways to quantify returns, including relative and absolute returns.
Since relative returns are assumed to track market trends, they are contrasted with a benchmark.
As investments are anticipated to perform independently of market fluctuations, absolute returns are calculated compared to zero.
Explores Unconventional Asset Classes
AIFs deal with certain asset classes which consist of different market characteristics. This leads to higher returns as the market risk reduces substantially.
Provides New Exposures and Opportunities
Being diverse in nature, alternative investments bestow investors with ample opportunities to find asset classes and commodities that are not accessible with traditional modes of investments. Besides stocks and bonds, an investor can choose to invest in commodities, real estate projects, or start-up business ideas. These days, there are a lot of alternative investment options available to increase returns exponentially, for instance, P2P lending, private equity, hedge funds, real estate, crowdfunding, invoice discounting, and more.
Exposure to alternative asset opportunities has a variety of benefits, and the resulting returns and allocations are indicative of recent shifts in the markets and investor preferences. Alternative investments are expected to continue growing quickly in order to provide competitive returns to traditional possibilities.
In contrast to mutual funds, stocks, and bonds, non-traditional investments offer potentially higher returns and diversification. Additionally, they have higher volatility than conventional investments like stocks, bonds, and mutual funds. Thus, instead of serving as the primary strategy of a long-term plan, a smart investor can view alternative investors as a tool for diversification.
Portfolio exposure to alternative asset opportunities has a variety of benefits, and the resulting returns and allocations are indicative of recent shifts in the markets and investor preferences. Alternative investments are expected to continue growing quickly in order to provide competitive returns to traditional possibilities.
In contrast to mutual funds, stocks, and bonds, non-traditional investments offer diversification and potentially higher returns, according to proponents of these types of investments. The average investor now has access to these types of assets, they just don’t have a correlation to the stock market.
In addition, they have higher volatility than conventional investments like stocks, bonds, and mutual funds. Most are comparatively illiquid, making it challenging to sell them fast.
These options tend to be more complicated and can involve more risks than conventional investments.
Instead of serving as the primary strategy of a long-term plan, a smart investor can view alternative investors as a tool for diversification.
Given the current market scenario, market volatility is most likely to continue to be a pain point for investors. And, heading into such a situation, it is imperative for investors to stay focused and continue to look for alternative investment opportunities to diversify their portfolios.