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Investing is an important part of financial planning that everyone should think about. However, investing is not a one-size-fits-all approach, and diversification is essential for risk management and return maximisation. While traditional investment vehicles such as stocks, bonds, and mutual funds provide stability and returns, they may not be enough to meet one’s financial objectives.
Alternative investments offer a one-of-a-kind opportunity to diversify one’s portfolio beyond traditional investments. We will look at how to diversify your portfolio with alternative investments in India in this blog.
Understanding Alternative Investments in India
Alternative investments are those that do not fit into the traditional investment categories of stocks, bonds, or cash. These investments are typically less liquid and riskier than traditional investments, but they have the potential for higher returns. Alternative investments have grown in popularity in India in recent years, and investors are increasingly looking for new ways to diversify their portfolios.
Alternative investments in India are broadly classified into six categories: real estate, private equity, hedge funds, commodities, art and collectibles, and cryptocurrencies. Each category has its own distinct set of characteristics, risks, and potential returns, making it critical to understand each before investing.
Real estate is one of India’s most popular alternative investments, with high potential returns and an inflation hedge. Private equity investments allow investors to invest in companies that are not publicly traded, potentially yielding significant returns. Hedge funds, on the other hand, are professionally managed investment funds that use a variety of strategies to generate returns, making them ideal for investors seeking higher risk and higher returns.
Benefits of Diversifying with Alternative Investments
Investing in alternative assets has grown in popularity as more investors look for ways to diversify their portfolios beyond traditional assets such as stocks and bonds. Alternative investments encompass a diverse range of assets that fall outside of traditional asset classes. Private equity, venture capital, real estate, hedge funds, commodities, and other assets may be included.
Diversifying your portfolio with alternative investments has numerous benefits, including:
Reduced Volatility
Alternative investments are not directly linked to stock market performance, so they can help reduce portfolio volatility. This is especially useful during times of economic uncertainty, when the stock market fluctuates.
Higher Returns
Alternative investments have the potential to outperform traditional investments in terms of returns. For example, private equity investments can provide returns of 20% or higher, compared to the average return of around 10% for the S&P 500.
Low Correlation
The correlation between alternative investments and traditional investments is low. This means they are less susceptible to market fluctuations and can provide a more consistent source of returns.
Diversification
Alternative investments allow investors to diversify their portfolio beyond traditional assets such as stocks and bonds. Investors can reduce their overall risk exposure by diversifying their investments across asset classes.
Access to New Markets
Alternative investments can expose investors to new markets and industries that traditional investments may not provide. Investing in a private equity fund, for example, can give you access to startups and small businesses that are not publicly traded.
Potential Tax Benefits
Certain alternative investments, such as real estate, can provide investors with tax advantages. Real estate investors, for example, can benefit from tax breaks on mortgage interest, property taxes, and depreciation.
Inflation Protection
Certain alternative investments, such as commodities, can offer inflation protection. As inflation rises, the value of these assets rises as well, providing an inflation hedge.
The Key to Successful Alternative Investments in India
Alternative investments can be a profitable way to diversify your portfolio, but success in this area requires careful research, due diligence, and a willingness to take calculated risks.
Here are some important factors to consider when making alternative investments in India:
- Identify your investment goals and risk appetite: Before making any investment, it’s crucial to determine your investment goals, risk tolerance, and time horizon. Because different alternative investments have different risks and rewards, it’s critical to match your objectives with the investment’s potential return and risk profile.
- Conduct thorough research: Alternative investments can be complex and opaque, so it’s important to do your due diligence and research the investment thoroughly. This includes investigating the investment’s past performance, management team, market trends, and potential regulatory risks.
- Look for transparency: Unlike traditional investments, alternative investments often lack the same level of transparency, which can make it difficult to assess their true value. Look for investments that provide clear and transparent reporting so you can track the performance of your investment and make informed decisions.
- Partner with a trusted alternative investments platform: Working with a trusted alternative investments platform, which has experience in alternative investments can help you navigate the complexities of this market and identify opportunities that align with your goals and risk tolerance. An alternative investments platform can also help you stay abreast of market trends and regulatory changes that could impact your investments.
- Be patient: Alternative investments frequently have longer holding periods and may require more time to generate returns. It is critical to maintain a long-term perspective and avoid expecting immediate results.
Key Takeaways
- Diversification is essential for reducing risk and maximising returns in investing. Alternative investments provide an exceptional opportunity for diversification beyond traditional investments such as stocks and bonds.
- Alternative investments in India are divided into six categories: real estate, private equity, hedge funds, commodities, art and collectibles, and cryptocurrencies. Before investing, it is critical to understand each of these categories.
- Diversifying with alternative investments has a number of advantages, including lower volatility, higher returns, low correlation, diversification, access to new markets, potential tax advantages, and inflation protection.
- To make successful alternative investments in India, investors must first determine their investment goals and risk tolerance, then conduct extensive research, look for transparency, partner with a reputable alternative investment platform, and be patient.
- Alternative investment success necessitates thorough research, due diligence, and a willingness to take calculated risks. Investors can diversify their portfolios and potentially achieve higher returns with proper guidance and a long-term outlook.
Diversified Real Estate Investments: A Strategic Approach
Through diversifying your portfolio, you invest in a number of different securities and types of assets, making sure that you don’t put all your eggs in one basket and that your overall return doesn’t depend too much on any single investment.
Savvy long-term investors understand this, and various types of stocks and bonds play a crucial role in diversified portfolios. However, there’s also an often overlooked gem: Commercial real estate.
Let’s delve into the strategies and benefits of building a diversified portfolio through investing in commercial real estate.
Commercial Real Estate: The Gem Your Portfolio is Missing?
As per Statista’s Outlook report, the commercial real estate market in India hit US$4.85 trillion in 2023. The compound annual growth rate of the market is projected to be about 11.50% yearly (2023-2028). This means the commercial real estate industry is projected to reach a market size of US$8.36 trillion by 2028.
If you’ve been scratching your head and pondering upon new alternative investment opportunities in India, look no further: India’s booming commercial real estate sector has got you covered.
Importance of Diversification in Real Estate: Beyond Traditional Investments
Real estate has often been hailed as the poster child for stable and secure investments. However, residential property prices are often in a bubble, as seen in the global housing crisis of 2008, and relying solely on residential properties can expose investors to market fluctuations.
On top of this, investing in residential properties requires large scale upfront money, which many investors might not be able to provide, and there is less flexibility when it comes to liquidity and exit strategies.
Over the past few years, the importance of diversification in real estate has become evident. Commercial real estate brings with it an entirely different dimension, often providing higher yields and returns with lower risk and volatility.
Building A Diversified Portfolio: Achieving Balance
Achieving balance is an art, and in the real estate world, it entails understanding different property types, locations, and market trends. Investors can tap into different market cycles by diversifying across commercial properties, ensuring a robust and resilient portfolio.
Developing effective investment strategies necessitates a thorough understanding of market dynamics. Commercial real estate provides additional income diversification through rental yields and the potential for capital appreciation. These assets can act as portfolio stabilisers, offsetting the volatility associated with other investment classes.
Benefits of Commercial Property Diversification: What are the Advantages?
Better Protection From Market Fluctuations
One of the biggest advantages of commercial properties is that they often have longer leases and much more stable cash flows. This provides a buffer against market fluctuations.
Stability is a core pillar of risk management, which is the principle behind diversifying your portfolio. This is helpful for investors to remain confident during uncertain times.
Portfolio Management
A diversified real estate portfolio contains a mixture of residential and commercial properties: this allows for efficient management. Investors can personalise their portfolios; tailoring them to align with their risk tolerance, investment horizon, and financial goals.
How To Choose The Best Commercial Property For Your Portfolio
Just like residential properties come in all sorts of shapes and sizes, it is crucial to understand the nuances of different commercial property types. You have your commercial office spaces in bustling city centres, warehouses in industrial cities and logistics hubs, and so on.
Each asset class brings with it a number of opportunities and challenges.
The Rise of Co Working Spaces
While coworking spaces are a recent phenomenon, in just a short span of time they have shown great growth. Based on an Upsuite report, demand for coworking spaces is up by 40%, and the market for shared housing spaces is expected to cross the 80 million square feet mark by the close of 2025.
Investors should take note of the upsurge in the coworking space. Co-working spaces provide great opportunities to earn rental income by investment through fractional or joint ownership models, commercial leasing and subleasing, and so on. And this trend shows no sign of stopping any time soon.
With more opportunities for investors, the segment will become more profitable for growth. However, operators must keep the cost-effective factor in mind. Tenants may find it difficult to rent in some of the most popular areas as demand grows. However, the industry must strive to provide service to customers, earn their trust, and provide the best solution for clients.
Tier 2 Cities: Unlocking the Potential of Commercial Real Estate
Investors are increasingly looking to turn to tier 2 cities in India such as Vizag, Kochi, Lucknow, and so on for opportunities in investing in commercial real estate.
These cities have lower populations but offer affordability, as property prices are significantly lower than in metro cities. Infrastructure development is on the rise due to the government’s smart cities program, and the growing middle class population in these cities has created huge demand for housing, shopping complexes, entertainment centres, you name it.
Government assistance in the form of investor-friendly policies, tax breaks, and regulatory reforms adds to Tier 2 cities’ appeal. The improved quality of life, as evidenced by less traffic and cleaner environments, adds to their allure. Diversification becomes a compelling reason to invest in these cities, allowing investors to diversify their portfolios while also tapping into the emerging market.
To Summarise
Diversification is essential for a successful investment portfolio, and alternative investments offer a one-of-a-kind opportunity to do so. Alternative investments provide advantages such as lower volatility, higher returns, low correlation, diversification, access to new markets, potential tax benefits, and inflation protection. However, investing in alternative assets necessitates thorough research, due diligence, and a long-term outlook.
With Assetmonk, investors can explore a range of alternative investments, including commercial real estate, co-living spaces, and more, all with a focus on generating stable, long-term returns. You can mitigate risk and maximise returns by diversifying your portfolio with alternative investments, and with Assetmonk’s expertise, investors can do so with confidence.
To say that commercial real estate is a shrewd choice for building a diversified portfolio would be an understatement. By doing proper research and understanding the intricacies of various commercial property types, as well as the type of alternative investment model you want to opt for, investors can navigate the dynamic commercial real estate landscape with ease and confidence.
Assetmonk, a new age alternative investment platform specialising in commercial real estate and fractional ownership of high end commercial properties, is always ready to guide investors on their journey towards building a well-rounded and prosperous portfolio.
Related Articles:
How to Evaluate Alternative Investment Opportunities in India
Types of Alternative Investments in India: Exploring Your Options
Benefits of Investing in Alternative Assets for Indian Investors
Diversify Your Portfolio With Alternative Investments In India
FAQs
Q1. What are alternative investments in India?
A. Alternative investments in India are investments that are not traditional investments such as stocks, bonds, or cash. Real estate, private equity, hedge funds, commodities, art and collectibles, and cryptocurrencies have all gained popularity in recent years.
Q2. What are the benefits of diversifying with alternative investments?
A. Diversifying with alternative investments can lower volatility, increase returns, provide low correlation with traditional investments, provide diversification, access to new markets, potential tax benefits, and inflation protection.
Q3. How do alternative investments help reduce risk in a portfolio?
A. Alternative investments are not directly tied to stock market performance, so they can help reduce volatility in a portfolio. Furthermore, because alternative investments have a low correlation with traditional investments, they are less likely to be affected by market fluctuations and can provide a more consistent source of returns.
Q4. What should I consider before investing in alternative investments in India?
A. Before investing in alternative investments in India, it is critical to identify your investment goals and risk tolerance, conduct thorough research, look for transparency in investments, partner with a reputable alternative investments platform, and have a long-term outlook.
Q5.Can alternative investments offer tax benefits in India?
A.Yes, certain alternative investments, such as real estate in India, can provide investors with tax advantages. Real estate investors, for example, can benefit from tax breaks on mortgage interest, property taxes, and depreciation.
Q6: Why should you look to diversify your portfolio?
A: Diversification spreads risk, making you less vulnerable to market fluctuations.
Q7: What is CRE?
A: Commercial real estate (CRE) is the investment in properties such as offices, retail spaces, and industrial complexes for income or capital appreciation.
Q8: What factors make Tier 2 cities appealing for CRE investment?
A: Tier 2 cities are appealing due to their affordability, infrastructure development, and government support.
Q9: Can commercial portfolios help in building a good portfolio?
A: Commercial properties generate consistent cash flows, acting as a hedge against market volatility.
