By Neha Juneja
It’s the 1990s, and Mr Patel is having a discussion over breakfast with his family about investing their extra cash. Mr Patel wants to invest their money in real estate, but his wife wants him to buy gold. His mother interrupts in between and suggests they invest in bank FD as it is a safe option, and they can get regular returns from that.
Now imagine it’s 2022; Mrs Sharma is having breakfast with her family and discussing investing their extra cash. Mr Sharma wants to invest his money in Mutual Funds, but their son wants to invest in options such as online bonds, private equity and P2P lending.
As we have seen in the two scenarios above, the investment philosophy is changing with time, in part because of more investment types being available to retail investors and technology making investments almost instantaneous. Gen Z it appears is more inclined towards the alternative investment options available.
These investment options work differently from conventional investment options. Today’s generation thinks very differently when it comes to their financial futures. People’ understanding and expectations from ‘investing’ is changing, and gone are the days when our parents used to invest their money in physical gold and real estate.
Over the last few years, India has noticed a shift in demographics. In the last decade, the number of people belonging to Gen Z (born between 1997-2012) has increased by a vast number, and after the Covid-19 pandemic, the number of young investors has increased. Since 2020, 17 million new investors have been added to the National Stock Exchange (NSE), which can contribute a lot to the country’s financial markets.
Though young investors seek quick returns, and they are willing to learn about and explore newer investment types, and that’s why they do not invest as much in the stock market as their older peers; they tend to churn their investments for better returns. Moreover, Fintechs and UPI payments have the maximum growth in their user base to Gen Z. Gen Z falls within the age group of the early 20s, and their lifestyle is very different from the older generations. Studies have shown that individuals belonging to Gen Z expect higher returns from their money with the flexibility of investing ad hoc amounts i.e. quick decisions. The newer generations love to live their life to the fullest in terms of spending, but they are also able to avoid potential problems and are often better money managers than their predecessors.
The Growth of Alternative Investments
The trends of alternative investments witnessed a spurt in the last decade; after the market crash of 2008, retail investors began to invest their money in other forms of investments since alternative investments are not directly related to the stock markets i.e. market indices do not affect alternative investments’ value, giving investors a great option to diversify their portfolios and create an all-weather portfolio.
Today, people are more aware of alternative investment options; when a wave of public companies went private after the recession, alternative investments gained in popularity, and people who never invested in alternative options started to do so.
Talking about the growth of alternative investment in India, it is one of the fastest-growing segments in the world of investing. Let’s have a look at some factors responsible for the growth in the segment:
- No direct correlation with the Stock Market: Volatility is the nature of Mr Market, and every value investor who is invested in the markets for the long run knows the importance of diversification of their portfolio, which is among the main reason investors seek new options to invest. Alternative investments have hardly any relation with the stock market, making its USP and attracting investors. Earlier, buying gold or investing in FDs, Real Estate was considered diversification. These investment options are still valid, but they do not attract investors who seek to generate wealth, as the ROI of the older options does not beat the investor’s expectations.
- Investing Passively: Alternative investment options allow an individual to invest passively as it does not require managing the investments actively. There are also complete passive investing options available in alternative investments where you can leverage the expertise of experienced players in the segment.
- Source of Income: Some alternative investments, such as antiques, do not generate cash flow unless sold at a premium. Still, private alternative investments are available that pay back the investors monthly or quarterly. Cash-flowing investment options are available, which can generate a return of up to 8-10% annually. With investments such as in P2P lending, you can create predictable monthly cash flows.
- Less Volatile: As mentioned, alternative investments are less volatile since they do not relate to the stock market and tangible assets back the investment. Volatility in the stock markets may affect compounding even in the long run, making alternative investments a great option.
- Rise in Fintech: Earlier, alternative investments were available only for HNI and UHNIs, but today, with the rise in new-age tech-driven platforms, people with the average salary can also invest in alternative investments.
- Aggressive Portfolio: With the rise in income, India is witnessing a surge in disposable income, and individuals can afford greater risk than before. Earlier, people preferred investing only in safe options; people want to explore new segments today which bring better returns in exchange.
According to the reports published by SEBI, alternative investment funds grew by 38% and have crossed 6 lakh crores as of December 2021, which is much higher than the growth in Mutual Funds, which stands at 22%..
With the rise in startups, technology and awareness, India is expected to see massive growth in alternative investment options. Apart from the investors, businesses also benefit from alternative investments as they can be financed more easily.
Buckle up and plan your Portfolio
As mentioned, alternative investments are an excellent opportunity to enjoy diversification and a hedge against the volatility in the market. Still, along with the chance, alternative investments also have some risks. As they are comparatively less liquid, you should invest only a part of your savings in alternative investments.
One should also understand that not all alternatives are equal in terms of risk! An essential factor you should see before investing in alternative investments is to look for a suitable investment platform and asset in the segment. You should also check if the investment is regulated. Investing in alternative investments is far easier than before, but looking for the factors can help you better plan your finances. Especially if you are new in the world of investing, it is more critical for you. Look for the lock-in periods before investing, do some due diligence on the founders/fund managers. Check the business model.
Another key factor is to ensure that the platform is regulated by some credible authority. For instance, in the case of P2P Lending, the Reserve Bank of India (RBI) regulates these platforms and has a set of guidelines for the working of the platforms. If the company wants to give P2P lending services, they need to get an NBFC-P2P license from the RBI. You should ensure the platform has this license. Similarly, all bonds issued by corporate need to follow SEBI guidelines. These types of alternatives have better compliance and risk management in place.
According to a study by Dexia Asset Management, 15-20% of your overall portfolio can consist of alternative investments. A good balance between risks and returns allows an individual to gain a good return when the segment performs well and brings safety when the conditions are not favorable. It is recommended to develop a portfolio that allocates different asset classes; alternative investment options are perfect for investors who understand the technology and how the whole thing works. Happy investing!
(Neha Juneja is the CEO and co-founder of IndiaP2P. The views expressed are author’s own.)