Alternative Investment Options in India
Gold, equities, mutual funds, and fixed deposits are frequently the first things that spring to mind when we think about investments. However, investors are beginning to take notice of an entire realm outside of these conventional options: alternative investments.
Particularly among high-net-worth individuals (HNIs) and astute investors seeking to diversify their portfolios, these unconventional alternatives are growing in popularity.
Alternative investments provide a means to think outside the box and maybe increase returns, from hedge funds and real estate to venture capital and even buying artwork or antiques.
What Is an Alternative Investment?
Financial instruments that go beyond conventional options like stocks and bonds are referred to as alternative investments. These consist of invoice discounting, fractional real estate, secured bonds, P2P lending, and securitized debt instruments.
The potential for larger returns, which frequently range from 9% to 14%, is what distinguishes these investments. These opportunities have special risks even if they have the potential to be very profitable.
Given the abundance of options accessible today, it’s crucial to thoroughly evaluate each one before making a commitment because they might not be as simple as more conventional investments.
Types of Alternative Investments in India
Beyond conventional stocks and bonds, India has a range of other investing options. The purpose of these alternatives is to assist investors in diversifying and investigating greater returns at different risk levels.
Secured Bonds for Seniors
These bonds are comparatively safer because they are secured by collateral. They are perfect for investors who are risk averse and offer fixed returns.
Securitized debt instruments
Securitized debt instruments, or SDIs, give investors the opportunity to profit on loans given to small companies. Although they carry a risk based on borrower repayments, they have the potential to yield larger rewards.
Leasing of Assets
In order to generate rental income, investors finance vehicles or equipment that firms lease. By serving as collateral, the assets provide an additional degree of protection.
Discounting Invoices
By financing short-term loans to companies that are backed by their outstanding invoices, investors are able to profit.
Peer-to-peer lending
Investors make direct loans to people or companies in exchange for interest. Although this kind of lending is riskier, it may yield substantial rewards.
Fractional Real Estate
High-value commercial properties are jointly owned by fractional real estate investors, who profit from property appreciation and rental income.
How Can Alternative Investment Products’ Risk Be Assessed?
It can be challenging to evaluate risk in alternative investments, but it is easier to do so when you break it down into a few easy steps.
- Determine the likelihood that you will lose your money first.
- Next, think about the ease of selling or withdrawing your investment.
- Additionally, find out whether the product is regulated and whether the distributors and company are reliable.
- Finally, investigate any dangers unique to the investment.
- You can make smarter decisions and have a better understanding of the risks by following these steps.
Secured Bonds
Particularly on internet marketplaces, secured bonds are a well-liked alternate investment choice. Secured bonds can generate double-digit yields, frequently between 10% and 11.5%, in contrast to conventional fixed-income instruments like government and corporate bonds, which offer interest rates of about 6–8%.
These bonds are backed by collateral, typically loans from Non-Banking Financial Companies (NBFCs), as the word “secured” suggests. “Senior” refers to the fact that, in the event of the issuer’s insolvency, investors have the largest claim of any bondholder.
| Type of Bond | Typical Yield |
| Government and Corporate Bonds | 6% – 8% |
| Senior Secured Bonds |
10% – 11.5%
|
It’s critical to comprehend the dangers associated with secured bonds. The following are five important risk variables to consider:
1. Principal Loss
Even if collateral supports secured bonds, losing your principal is still a possibility. A moderate to acceptable degree of risk is indicated by the credit ratings of many issuers, which are in the range of A or BBB.
These ratings typically have default rates of less than 2%, but when they do occur, it may take some time to get your money back.
2. Risk to Liquidity
Although the secondary market for secured bonds is underdeveloped, they are frequently listed on stock exchanges. This implies that when you want to sell your bond, you might have trouble finding a buyer and, if you do, you might have to sell it at a discout
3. No Risk of Regulatory Oversight
The RBI oversees secured bond issuers, mostly NBFCs. However, until SEBI implemented regulations for Online Bond Platform Providers (OBPP) in November 2022, many online platforms that sell these bonds were unregulated.
Therefore, as an investor, be sure that the platform you are working with is registered with the National Stock Exchange or the Bombay Stock Exchange.
4. Risk Particular to a Platform
Exclusive bond offerings are frequently available on online platforms, which perform due diligence before making them available to investors. These platforms, however, are not responsible for issuer defaults.
Even if there haven’t been any notable defaults yet, it’s crucial to limit your investment portfolio to regulated platforms.
5. Risk Specific to Instruments
Investing in these bond issuers is riskier because the majority of them don’t have the best credit ratings. Although security is provided by the issuer, 100% recovery in the event of default is not guaranteed. Choose issues with shorter tenures to reduce the risk.
5.Instruments for Securitized Debt
Although the idea of securitized debt instruments is not new, ordinary investors can now access them through online bond platforms.
Through these products, loans from Non-Banking Financial Companies (NBFCs) are transferred to a trust, which then distributes the payback to investors.
Let’s look at the main risk factors for SDIs:
1. Principal Loss
Borrowers, not the NBFC, bear the risk of capital loss. Platforms do, however, provide extra security in the form of guarantees (e.g., personal guarantees or fixed deposits). Partial loss is possible even with collateral, although the risk is reduced by the dual protection.
2. Risk to Liquidity
Although stock exchanges frequently list SDIs, the secondary market is not very liquid. A buy-and-hold approach is advised for investors because it may be challenging to sell in the middle.
3. No Risk of Regulatory Oversight
Depending on whether banks or NBFCs are engaged, securitization regulations are enforced by both SEBI and the RBI. A safer investing environment is ensured by these regulations, which lower the oversight risk.
4. Risk Particular to a Platform
Now that online bond platforms are regulated by SEBI, platform-specific hazards have been greatly decreased. To reduce danger, it’s still crucial to make sure you choose platforms that abide by these rules.
5. Risk Specific to Instruments
Even though SDIs provide further security in the form of guarantees and collateral, they cannot provide a 100% recovery in the event of default. This implies that you may still sustain losses even though you have dual security (the asset plus an extra assurance).
Leasing of Assets
Companies can raise money by leasing out assets (such as machinery or cars) through asset leasing. With the leased assets serving as collateral, investors profit by collecting lease payments.
Let’s examine the dangers:
1. Principal Loss
Asset leasing instruments are assessed according to the quality of the underlying assets, just like SDIs. Additional assurances, such as property or personal guarantees, are frequently offered by platforms. Even while the collateral reduces risk, there is still a danger that some of the investment could be lost.
2. Risk to Liquidity
Although asset leasing instruments are listed on stock exchanges, there isn’t much of a secondary market for them. You should be ready to keep onto your investment for the duration, just like with SDIs.
3. No Risk of Regulatory Oversight
Depending on the issuer, regulatory monitoring differs. It’s critical for leasing companies to confirm whether they are governed by the RBI or another regulatory agency. Some leasing companies might function with less regulation even while securitization standards are in place.
4. Risk Specific to Platforms
By regulating bond platforms, SEBI lowers platform-specific risks. But before making an investment, careful study is crucial.
5. Risk Particular to Instruments
There is no absolute assurance that you will get your money returned in full in the event of default, even though these instruments are backed by extra assurances.
Discounting Invoices
As a financing strategy, invoice discounting allows companies to cover their short-term financial demands by selling their outstanding invoices at a discount.
For instance, a trader provides items to a big business, but it takes 90 days for the payment to arrive. The trader sells the invoice to a lender (such as a bank or NBFC) for a marginally reduced price in order to manage cash flow. The financier receives the money right away and collects the full payment later.
This idea is combined with several invoices and offered to investors on internet marketplaces.
Let’s examine the potential hazards:
1. Principal Loss
The fundamental risk is the potential for the buyer (such as a big business like ITC) to postpone or fail to make the payment. There is no assurance that you won’t lose some of your money, even though financiers review the companies and bills. Nonetheless, the pool structure aids in distributing the risk among several invoices.
2. Risk to Liquidity
The secondary market for invoice discounting is still in its infancy, despite the fact that these invoices contain a specified payback schedule (such as 30, 60, or 90 days). Selling your investment before it matures could be difficult for you as an investor. Put simply, you will probably have to keep the investment until the money is received.
3. No Risk of Regulatory Oversight
For added security, SEBI oversees invoice discounting systems, just like it does other instruments. But be sure the platform you utilize is legally compliant and appropriately registered.
4. Risk Particular to a Platform
Although platforms review and choose the invoices, they do not bear liability for losses in the event of an error. Although these sites conduct extensive inspections, it’s important to confirm their legitimacy.
5. Risk Specific to Instruments
The short-term nature of bills lowers the possibility of protracted defaults. Invoice discounting does not, however, provide complete recovery in the event of non-payment, much like other alternative investments.
Lending from Peer to Peer
P2P lending, or peer-to-peer lending, has grown in popularity as an alternative investment. It is a fairly simple notion. It enables people to use online platforms to lend money directly to borrowers.
Let’s examine the main dangers of peer-to-peer lending:
1. Principal Loss
There is always a chance that a borrower may default in P2P lending, which would result in a loss of cash. Since you are dependent on each borrower’s repayment, lending directly to them carries a higher risk. Most platforms split your money across several borrowers in order to lower this risk.
On the other hand, lending to the platform itself carries a lesser risk, while there is still a chance that it could fail. To reduce risks, it’s critical to look at the platform’s credit rating and choose shorter investment terms.
| P2P Lending Model | Lender Type | How Money is Distributed | Risk Level | Liquidity | |
| Direct to P2P Platform | Investor → P2P Platform | P2P platform distributes to multiple borrowers | Lower (due to diversification) | Some liquidity options | |
| Direct to Borrowers | Investor → Borrowers | Directly lends to individual borrowers | Higher (exposure to each borrower) |
|
2. Risk to Liquidity
Liquidity is an issue if you lend money directly to borrowers. Your money won’t be available for withdrawal until the loan matures. The platform might begin a recovery process in default situations, but there’s no assurance you’ll receive your entire investment back.
However, there is more flexibility to liquidate your investment and a certain amount of liquidity if you invest directly through the platform.
3. No Risk of Regulatory Oversight
P2P systems are subject to RBI regulation, which offers some degree of supervision. This gives investors some protection, even though it doesn’t completely remove the hazards.
4. Risk Particular to a Platform
Some P2P systems are better governed than others, despite the fact that they are all regulated. Examining the platform’s Non-Performing Assets (NPAs) and financial health is crucial before making an investment. This might help you better understand the risk profile of the platform.
5. Risk Specific to Instruments
In addition to what we have already covered, P2P does not carry any instrument-specific risk. Diversify across platforms and borrowers to spread the risk.
Real Estate Fractional
Co-owning a property is possible with fractional real estate. This implies that investors pool their funds to co-own upscale properties, such as office buildings
You benefit from both the rent, which may be between 6 and 8%, and the property appreciation, which may be between 4 and 8%. Therefore, you have a decent chance of earning up to 10% if you remain invested for the long run. But there are risks associated with rewards.
Let’s now use our approach to assess this product.
1. Principal Loss
In hard economic circumstances, it can be hard to locate tenants, which affects rent and property values. However, this risk is moderate as India’s economy expands.
2. Risk to Liquidity
Liquidity risk is inherent in real estate. You have to verify the lock-in time when fractional ownership is involved. There are no assurances when it comes to selling your stake; it all depends on finding a buyer.
3. No Risk of Regulatory Oversight
Platforms that sell fractional real estate are still unregulated. However, by permitting asset listings on public exchanges, SEBI’s new regulations for Small and Medium REITs (SM REITs) will increase oversight and liquidity.
4. Risk Particular to a Platform
Not all platforms are run equally, and there may be issues with fraud or poor administration. Sebi’s SM REIT rules, however, ought to alter this. Therefore, it becomes sense to hold out until SM REITs provide a more secure investment choice.
5. Risk Specific to Instruments
While rental income yields consistent profits, property appreciation necessitates a sustained investment. Furthermore, investor voting is frequently used to make important decisions, so your returns may be impacted by the majority rule.
Risk Type |
Key Concern |
| Loss of Principal | Tenant recruitment is challenging during recessions. |
| Liquidity Risk | Selling property shares can be challenging. |
| No Regulatory Oversight | Regulation is lacking, but SM REITs might make this shift. |
| Platform-Specific Risk | Platforms that are dishonest or poorly managed |
| Instrument-Specific Risk | Holding for a long time is necessary for capital growth. |
Benefits and Drawbacks of Alternative Investments
Although alternative investments present thrilling prospects like diversification and increased returns, they also carry hazards including platform-specific challenges and liquidity problems. Although they might be an excellent hedge, experienced investors who are knowledgeable about intricate financial instruments are the ones who should use them.
Advantages |
Disadvantages |
| Growth-oriented investors find alternative investments appealing due to their increased returns. | Because of the nature of the investments, they have a greater chance of losing principal. |
| By exposing investors to non-traditional assets, they aid in portfolio diversification. | Since these investments are more difficult to sell immediately, liquidity may be a problem. |
| Investors have access to special opportunities and specialty marketplaces that aren’t found in conventional markets. | Risk is increased by the fact that many of these investments are not adequately regulated. |
| They can provide stability during erratic periods by serving as a hedge against market volatility. | Platform-specific hazards include problems with openness and management. |
| Some offer passive income prospects, including fractional real estate rental income. | These investments require a deep understanding, making them unsuitable for beginners. |
Alternative Investments’ Tax Consequences
It’s critical to comprehend the tax ramifications of investing in alternative assets.
- Capital Gains: Capital gains tax applies to profits from non-traditional assets, such as fractional real estate. Long-term gains (those kept for more than 36 months) are taxed at 20% with indexation benefits, while short-term gains (those held for less than 36 months) are taxed at your ordinary income tax rate.
- rental or lease income: Fractional real estate rental or lease income is taxed like regular income, added to your total income, and taxed according to your income tax slab.
- Tax Variations: The tax treatment of various alternative investments may differ. For example, the tax treatment of asset leasing and securitized debt instruments may differ.
- Impact on Returns: It’s critical to incorporate tax considerations into your investment planning because taxes have the potential to reduce your total returns.
The bottom line
In conclusion, asset leasing and SDIs are examples of nontraditional investments that carry a high risk but can yield appealing rewards. Diversification across platforms and goods is crucial, and emergency money should not be used for these investments.
Increase your investment gradually after starting small and becoming accustomed to the hazards. These products are not appropriate for novices seeking their first investment; rather, they are best suited for seasoned investors.
FAQs:
Which Qualities Are Most Important for Alternative Investments?
The potential returns on alternative investments are higher. They may be less liquid than stocks or bonds, are less common than regular options, and frequently have special risks.
How Can Investors Benefit from Alternative Investments?
Particularly in specialized industries like real estate or private equity, they offer chances for greater profits and diversify portfolios.
Which regulations apply to alternative investments?
Although regulations differ depending on the type of asset, platforms frequently adhere to rules set forth by regulatory agencies such as SEBI or RBI, providing a certain level of investor protection.
Can I Invest in Gold as an Alternative?
Generally speaking, gold is not seen as an alternative investment. This, however, varies according to the kind of gold. While gold leasing can be seen as an alternative investment choice, physical gold, gold ETFs, and gold mutual funds are all considered classic investments.
How Can I Pick a Different Kind of Investment?
Assess the platform’s reputation, liquidity, risks, and regulatory environment. For improved risk management, diversify your product offerings.
What Constitutes an Alternative Investment Example?
P2P lending, asset leasing, invoice discounting, senior secured bonds, securitized debt instruments, and fractional real estate ownership are a few examples.
