ALTERNATIVE INVESTMENTS

Alternative investments go beyond traditional investments like investing in assets such as private equity, venture capital, hedge funds, real estate, commodities, cryptocurrencies, art, etc.

They may be attractive for investors seeking diversification, higher potential returns, and have ability withstand higher risk.

However, it is crucial to evaluate specific investment opportunities before taking any decision.

Question now is how to evaluate?

• Research & understand, market dynamics, historical performance, and regulatory considerations.

• Gather information only from credible sources, as the risks are high

• Evaluate potential risks, including market risk, liquidity risk, operational risk, regulatory risk, and specific risks related to the asset class.

Also consider

• Entry exit barriers &

• Impact on your overall portfolio.

• Check both short and long-term performance over different market conditions for consistency, volatility, and its performance against its benchmark.

• Evaluate management team’s expertise and track record, and their ability to adapt to changing market conditions. They should mitigate risks and enhance potential returns.

• Check whether returns justify the level of risk you are willing to take and ensure investment aligns with your risk tolerance & investment goals.

• Higher returns usually come with higher risks, so strike a balance that aligns with your objectives & complements your existing investments

Let us now deep dive into its pros & cons

PROS

• They often have low or negative correlation with the stock market, which can help reduce overall portfolio risk.
• Some alternative investments, such as private equity or venture capital, can generate significant returns over the long term.
• They provide access to unique opportunities. For example, investing in real estate or startups can offer exposure to niche markets or emerging industries.
• Inflation Hedge – alternative investments, like commodities / real estate, can act as a hedge against inflation. They have the potential to increase their value during inflationary periods.

Cons

• They carry higher risk & can be illiquid, have higher volatility, and may lack transparency.
• Risk of capital loss may be higher compared to traditional investment
• Limited Liquidity: Many alternative investments have limited liquidity, lock-up periods, and restricted redemption
• They require a deeper understanding of the underlying asset class and associated risks. Managing is complex and require specialized knowledge / support of professional advisors.
• Some operate in less regulated or opaque markets, which can expose investors to additional legal and regulatory risks.

BOTTOM-LINE

If you are planning for alternative investments in India, consider

• Checking Risk-Reward ratio, performance track record & credibility of the investment provider.

• Getting professional advice or consulting with experts who specialize in the specific asset class.

• Evaluating exit strategy and liquidity terms. Check lock-up periods and other restrictions / limitations on accessing your investment capital.

• Ensure compliance with applicable regulations and is offered by authorized entities. Understand the legal framework and any regulatory approvals or licenses required for the investment.

It’s important to conduct your own research, seek professional advice, and carefully assess the risks and potential rewards of alternative investments before making any investment decisions.