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Should All Investors Dip Their Feet Into Alternative Investments?
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In this series, we cover all instruments, schemes and products in the alternative investment space available for Indian retail investors.
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India's alternative investment market is projected to grow significantly, reaching $2 trillion by 2034, but it may not be suitable for all investors to dive into this industry.
Alternative investments in India tend to lack liquidity, making it difficult for investors to convert them to cash quickly, which can be a concern for those needing immediate access to funds.
Alternative investments also carry a higher degree of risk compared to traditional options like PPF and Bank FDs, potentially leading to financial losses if risks are not carefully assessed.
The complexity of alternative investments requires a higher level of knowledge and expertise, which can be a barrier for some investors who may find them difficult to understand.
Regulatory concerns and high minimum investment requirements create additional challenges, limiting access for many retail investors and raising concerns about fraud and manipulation in unregulated areas.
In the next 10 years, i.e. by the year 2034, India’s alternative investment market is expected to grow five-fold, from its current size of $400 billion to $2 trillion! Surely, at a time when India’s market is showing a lot of volatility, this massive number is in itself a reminder for investors to not ignore the alternative investment market in India.
But but but, is this market for everyone? Should all retail investors break away from the old and traditional investment options like Bank FDs or PPF and start investing in alternative investments? Well, maybe not. After all, the ‘one size fits all’ motto doesn’t work here!
So, before you step into the world of alternative investments and put your hard-earned money into them, it would be wise to understand why you should NOT invest in alternatives.
While these investment options can indeed help you diversify your portfolio and unlock the potential to fetch higher returns than the traditional investment options, check out these reasons why some investors might want to avoid or be cautious before dipping their feet into alternatives in India.
A lot of alternative investments, such as real estate, private equity, hedge funds, and even bonds, are not easily convertible to cash. They often come with lock-in periods during which investors cannot redeem their funds, or sometimes find it difficult to convert them to cash, which can lead to potential liquidity issues when you need the money. So if you are an investor who is looking for liquidity, alternative investments may not be suitable for you, at least at present, until this market becomes more mature and is able to reduce the level of illiquidity.
It's important to keep in mind that alternative investments often carry a higher degree of risk than traditional instruments like PPF and Bank FDs. Given that a key reason why many investors stick to such traditional investment options is the extremely low level of risk involved, they must remain cautious when approaching alternative investments, since they might be offering higher returns, but with higher risk too! This can result in you losing your money if you are not aware about the risks associated with a particular alternative investment option. So, do NOT ignore the risks associated with any investment option or asset class. After all, its better to be safe than sorry, right?
By the way, here’s an insightful blog of ours which you can read to gain help in striking a balance between risks and returns.
It's fair to say that investing in alternatives usually requires a higher level of knowledge and expertise in understanding the products, due to their complex structures when compared to the relatively simpler traditional instruments like bank FD, PPF and mutual funds. So, if alternatives seem too difficult to understand, you may avoid dipping your feet into this market. Nonetheless, it's important for you to consult a financial advisor if you still wish to invest in the alternative industry.
While some alternative investments such as bonds are being well-regulated by the market regulator SEBI, there are still many which are unregulated, such as invoice discounting and crypto. This lack of regulatory oversight raises concerns about fraud and manipulation, which is why you may want to stay away from unregulated investment products.
Many alternative investments still have high minimum investment requirements, such as invoice discounting (starts around Rs 50,000- Rs 1 lakh), SDIs (starts around Rs 1 lakh), etc. This limits the access of these alternative investments for many retail investors, thus excluding a large portion of the investing population from participating in alternatives, unless the minimum investment amount gets reduced in near future, just like it happened in case of corporate bonds, wherein SEBI drastically reduced the minimum ticket size from Rs 1 lakh to just Rs 10,000 in 2024.
In the end, we can say that while alternative investments present unique opportunities for portfolio diversification and potentially higher returns, they come with their own set of drawbacks and risks, that can outweigh the benefits for some retail investors.
Factors such as lack of liquidity, higher degree of risk, complexity in understanding, regulatory concerns, and high minimum ticket size (for some alternatives), should be carefully considered before dipping your feet into the world of alternative investments. It is crucial for you, as an investor, to thoroughly evaluate these aspects and consult a financial advisor to make informed decisions.
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Please note that this is an opinion blog and not an official research or investment advice. This blog aims to help retail investors make an informed decision when thinking of making alternative investments a part of their portfolio. The blog neither encourages nor discourages you from investing in any particular platform or property or any asset class.
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