The term 'investment' is normally associated with equities and fixed income instruments, by the investors. Some investors also associate insurance with investments. Investors may note that insurance is basically to cover risks and its not an investment product. The general tendency of retail investors is to enter the stock market when prices are high. So, the end result is that you may not earn significant return compared to the risk undertaken.
In case of fixed income products, returns are best during inflationary times. However, it means that even if you are able to get a good return on your investment, the 'net earning' is low, as inflation eats away into your earnings. Day by day, investors also have to face increasing level of sophistication in market and high volatility due to global events. The question, then, is how does one counter such a situation and create wealth for oneself?
A straightforward way out is to look at alternative investments. These investments have the ability to reduce the risk of your portfolio by way of diversification. Most of the alternative investments have extremely low correlations to price movements in more traditional financial securities markets.
The whole idea should be to initially build a base portfolio of traditional assets and then diversify into alternative investments. It will help you to partially insulate from the risk in equities and the fixed income market. Such a strategy can be enticing from a risk control point of view, especially when financial markets become overvalued.
| WHAT ARE THEY? # Alternative investments have the ability to reduce the risk of your portfolio by way of diversification # Most alternative investments have extremely low correlation to price movements in more traditional financial securities markets # Alternative investment asset classes are gold, commodities, art, real estate, etc # They are highly illiquid and relatively less traded. They are also extremely complex. |
Avenues for alternate investments are explored below:
Gold: Gold is even regarded as an alternate currency. Gold protects one's portfolio from volatility, as micro-economic and macro-economic factors that tend to have significant impact on other asset classes have virtually little impact on gold prices. Gold is a very good hedge against inflation. It is advisable to buy gold in the form of exchange traded funds (ETFs). e.g. Gold BEES, Quantum Gold ETF, Kotak Gold ETF, etc. If you prefer physical gold, better buy bars or coins. Ideally, avoid buying from a bank, as it would be more expensive. Also, banks can't buy gold back from you. Better to buy from a reputed jeweller instead.
Commodities: Investing in commodities can be in the spot market or in the derivatives market. Commodity derivatives are traded on the exchanges, such as National Commodity and Derivative Exchange (NCDEX), Multi-Commodity Exchange (MCX), etc. Gold, silver, agri-commodities including grains, pulses, spices, oils and oilseeds, mentha oil, metals and crude are some of the commodities that these exchanges deal in. Trading in commodities futures is quite similar to equity futures trading. You could take a long position (where you buy a contract) or a short position (where you sell it). Simply speaking, like in equity and other markets, if you think prices are on their way up, you take a long position and when prices are headed south, you opt for a short position.
Art : Although an attractive investment option, art suffers from problems such as poor liquidity, high costs, uncertain valuations and lack of a regulatory environment. Instances are paintings by renowned artists such as M F Hussain, Raja Ravi Verma, Picasso, etc.
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Real estate: This form of investment usually requires huge investment and proper planning and evaluation. In India, historically, real estate prices are always high. This is due to heavy demand and limited quality supply. Real estate may not only give you returns in the form of capital appreciation but also give regular income in the form of rent.
Others: Non-traditional assets such as precious metals and stones, art, antiques and collectibles such as carpets, shawls, coins, stamps and fine wines, among others, are a few other alternative investment options.
Certain financial instruments, too, can be considered alternative investments, as they are not explored by many investors. Some of these are enumerated below :
Government Securities: This is sovereign debt and has the highest safety. Investors can look at locking in returns at a yield of more than 8.35 per cent for a period of 20 years. It can give a steady source of income for a long duration. w.g. GS 2032 (yield - 8.47 per cent), GS 2027 (yield - 8.35 per cent), etc. It is possible for retail investors to put money in these and earn interest on a half-yearly basis. In this regard they can contact primary dealers such as SBI DFHI, IDBI Gilts, PNB Gilts, etc.
Arbitrage funds: Arbitrage funds try to earn returns by capitalising on the arbitrage opportunity that arises when the price of a stock (in stock/cash/spot market) trades at a discount to the price of its future contract (in futures/derivatives segment). Arbitrage funds are relatively less risky as compared to pure equities. However, they cannot be slotted as “risk-free”. Arbitrage funds do have an element of risk.
Structured Products: Structured products are products devised in such a manner so as to minimise risk and better return. Structured products are generally a pre-packaged investment strategy, based on derivatives, either a single security or on a basket of securities, indices, commodities, debt issuances, etc. Some of the structured offerings are principal-protected, which offer protection of principal if held to maturity. e.g. capital protection funds launched by Franklin Templeton MF, Birla Sun Life MF, IDFC MF, etc. However, a word of caution: some structured products are too complicated and investors may not be able to comprehend their nature. In such cases, it is better to avoid these.
Limitations of alternative investments: Some alternative assets such as art, jewellery and antiques have no regular income. Also, they are highly illiquid and relatively less traded. They are also extremely complex. It is difficult to determine their prices at times. Some investors had a bad experience in investing in the Osian Art fund launched a few years earlier.
Alternatives are not difficult to understand and invest.. With the information revolution and the high amount of money chasing financial assets, it is imperative that investors look at alternatives to have an extra edge to their returns.
The author is a freelance writer