Alternative Investments to Diversify Portfolio
Most investors prefer to diversify their investment portfolio to reduce the risk and earn optimum returns. The traditional investments of equity mutual funds, fixed income products like bank fixed deposits, PPF, etc., are well known to most investors. In this article, we will discuss various types of alternative investments like P2P lending, REITs, InvITs, collectibles, asset lease financing, invoice discounting, etc. to diversify your portfolio.
What are alternative investments?
Alternative investments are a very wide term and include many investment products that come under various regulators like SEBI and RBI. Some are still not regulated by any regulator.
SEBI has primarily divided alternative investments into three broad categories:
- Category I: These alternative investment funds invest in start-ups or early-stage ventures. They include venture capital, social ventures, small and medium enterprises (SMEs), infrastructure, and other economically and socially desirable areas/sectors.
- Category II: These include private equity funds or debt funds.
- Category III: These include hedge funds or other funds that employ diverse or complex trading strategies and employ leverage.
Various alternative investment funds (AIFs) have registered with SEBI under one of the above categories based on their type.
Growth of the alternative investment market in India
SEBI issued the first set of guidelines for alternative investments in 2012. For the first couple of years, the alternative investment market was nascent. But, in the last few years, it has steadily grown.
As seen in the above chart, by September 2020, alternative funds had invested USD 22.7 Billion in India.
The current size of the AIF market in India
SEBI compiles and publishes the data related to the activities of AIFs every quarter
As seen in the above table, as of 31st March 2021, AIFs have made investments of over Rs. 2 lakh crores in India. Out of this, most of the investments have been made by Category II AIFs that provide private equity or debt.
Other types of alternative investments
The alternative investments discussed in the above section have a high minimum investment requirement which is out of reach for most individuals. So, let us now discuss some other alternative investments that have a lower minimum investment requirement.
Some of these include:
Peer to Peer (P2P) Lending
A Peer to Peer (P2P) lending company acts as an intermediary between borrowers (people who need money and are willing to pay interest) and lenders/investors (people who have surplus money and are willing to lend for earning interest). So, if you have surplus funds, you can lend them to a borrower through a P2P company and earn interest.
The RBI regulates the P2P lending companies. They are categorised as Non-bank Financing Companies (P2P Lending NBFC). Some of the well-known P2P companies in India include Faircent, i2iFunding, etc.
The interest rate that you can earn from giving P2P loans is higher than the interest rate that you will earn from a bank fixed deposit. But, with P2P loans, there is a risk of the borrower delaying or defaulting on the loan repayment.
Real estate investment trusts (REITs)
A real estate investment trust (REIT) is a trust that raises money from investors and invests them in rent-earning real estate properties. The REIT issues units to investors against their investment, just like a mutual fund. The rent earned from the rented properties is distributed back to the investors.
You need a trading and demat account for investing in a REIT. The REIT units are listed on a stock exchange and can be bought and sold from there. As per SEBI guidelines, a REIT has to distribute 90% of its income after deducting expenses to its unitholders at least twice a year. So, REITs can provide you regular income either quarterly or half-yearly. There is also potential for capital appreciation. Currently, there are three REITs listed in India, which include:
- Brookfield REIT
- Embassy REIT
- Mindspace Business REIT
Infrastructure Investment Trusts (InvITs)
Like a REIT, an Infrastructure Investment Trust (InvIT) is a trust that raises money from investors and invests them in income-earning infrastructure projects. The infrastructure projects include roadways, power transmission lines, mobile towers, etc. The InvIT issues units to investors against their investment, just like a mutual fund. The income earned from the infrastructure projects is distributed back to the investors.
The buying and selling of InvIT units happen through a stock exchange, just like a REIT. You can earn regular income from your InvIT holdings in the form of dividends either quarterly or half-yearly. There is also potential for capital appreciation. Currently, there are three InvITs listed in India, which include:
- POWERGRID Infrastructure Investment Trust
- India Grid Trust
- IRB InvIT Fund
Collectible investments are physical objects that have the potential to appreciate in the future. Some examples include stamps, coins/currency notes that are no longer in circulation, vintage bikes or cars, wine bottles, paintings/drawings/other art, gems/jewellery, limited edition items, etc. People accumulate these collectibles in the hope that their value will appreciate in the future, and then they will be able to sell them for a good profit.
The collectibles investment market is very illiquid. The value of collectibles is very subjective based on what people are willing to pay for them. Some collectibles are sold through auctions or other bidding processes organised by various organisations. If you wish to accumulate collectibles as an investment, you need a lot of patience. In the case of some collectibles, it takes years or a decade for the value to be unlocked. If you wish to accumulate collectibles as an investment, it should form a very small part of your investment portfolio.
Asset lease financing
Many people temporarily shift to some other city from their base location for a job or assignment. During their short-term stay in the other city, they need assets like furniture, vehicles, and other equipment. They lease these assets rather than buying them. Just like individuals, many corporations also take these assets on lease.
Companies like Grip (www.gripinvest.in) take money from investors, buy these assets and lease them to individuals or corporations. As an investor, you can join Grip as a partner and invest money in the purchase of assets for leasing. You will get attractive returns on your investment.
Many SMEs and MSMEs supply goods and services to large companies. They raise invoices and send them to the company. Many companies have an invoice payment tenure of 30-90 days. The SME/MSME may have an urgent cash requirement and may not be in a position to wait for 30-90 days to receive the payment against the invoice.
In such a case, the SME/MSME approaches a bank, NBFC, or other organisation. They raise money against the security of the unpaid invoice at a discount. The rights of the invoice get transferred from SME/MSME to the organisation paying the money against the invoice. Later, the company on whom the invoice was raised pays the invoice amount to the organisation that holds the rights to the invoice. This process is known as invoice discounting.
For example, SME ABC has raised an invoice of Rs. 10 Lakhs on Company XYZ, which has an invoice payment tenure of 90 days. SME ABC may do invoice discounting with NBFC PQR at 5%. NBFC PQR will pay Rs. 9.5 lakhs to SME ABC. After 90 days, Company XYZ will pay the invoice amount of Rs. 10 lakhs to NBFC PQR.
Companies like KredX (www.kredx.com) are platforms for invoice discounting. You can register as an investor. You can fund various companies that are looking to raise money against unpaid invoices through the process of invoice discounting. As an investor, you earn returns for every invoice that you fund.
Asset allocation with Glide Invest App
You may allocate a certain portion of your investment portfolio to alternative investments. You need to follow asset allocation to diversify your investment portfolio as per your risk profile. Appropriate asset allocation includes investing in various asset classes like equity, debt, gold, real estate, alternative investments, etc. You can partner with the Glide Invest App to understand your risk profile and get recommendations for the appropriate investment products. You will get advice on how to plan and systematically invest towards your financial goals.
With Glide Invest, you will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved