Investment for most of us means one of two things. Stocks, or fixed income instruments, such as fixed deposits or bonds. They are among the simplest and most well-known tools to create wealth. But the investment world is not restricted to equities or fixed income instruments. There are a vast number of instruments that could be equally good, if not better, at creating wealth. All instruments not classified as either equity or debt are called alternative investments.
What are alternative instruments?
The world of alternative investments contains many asset classes and securities. Asset classes considered alternative investments are real estate, commodities or artworks. Then there are structured financial products. These products may invest in regular asset classes such as equity but in a different way. For instance, there are angel funds that invest in early-stage startups. Then there are middle-stage venture-capital funds. Or late-stage private-equity funds that buy shares of established but unlisted companies. There are also alternative-investing products where highly-experienced fund managers follow a differentiated strategy. A hedge fund that trades derivatives or invests in high-yield debt is an example. Its goal is to generate alpha, or excess returns over the usual stock market benchmarks. Such funds may also use leverage to make the best of an opportunity. Alternative investments also include emerging avenues like cryptocurrencies or NFT art.
Should you consider alternative investments?
Like equity and debt, individual asset classes and products have their own risk-return profiles. A hedge fund that invests in exotic derivatives is different from a fund that invests in global equities. Or a private-equity fund that invests in established startups. Depending on the product, they can carry varying degrees of liquidity risk and higher volatility. The answer to whether to invest in alternatives depends on your investment horizon and risk appetite. A financial planner can help a retail investor answer this question. The planner can also help decide which instrument they should look at. Most experts believe that alternative investments diversify one’s portfolio. So they may cushion the impact of a downturn in core asset classes. Or they could even take advantage of such a downturn. For example, funds that short-sell equities profit from a market fall. Gold tends to rise during times of uncertainty, something that’s also said of bitcoin now.
How should you invest in alternatives?
Depending on your asset allocation plan, you can keep a small to sizeable portion of your portfolio in alternatives. Typically, alternative investments must be ‘satellite’ holdings. This means they are smaller than large, ‘core’ holdings that comprise of debt and equity. If your alternative investment is also based on equity, you can have a bigger allocation. An example of this is an ETF or a fund that invests in startups. That’s because such funds will enjoy a similar risk-return profile to stocks. You have both choices. You can make direct investments. Or invest in a non-discretionary fund where a manager takes investment decisions.
Who is eligible to invest in alternative funds?
It depends. Some alternative investment products are complex and may be riskier. So regulators and even fund companies keep thresholds to filter out investors for whom such products may not be the right fit. These can be in the form of a large minimum investment size or a lock-in. For instance, in India, SEBI's rules for alternative investment funds (AIF) set the investment size for such funds at Rs 10 million. Private wealth managers can levy a higher threshold. Kristal.AI offers a wide variety of alternative investment options, chiefly through global ETFs and curated portfolios. These can have lower minimum investment thresholds compared to traditional AIFs or private-wealth products.
How to invest
Depending on which product you want to invest in, you will have to approach companies that offer them. For e-gold or cryptocurrency, you may need to have an account with the intermediaries. At Kristal.AI, we work with various wealth managers in India to offer curated ETFs, Kristal portfolios and global funds. These allow investors to invest in private equity, pre-IPO deals, VC funds and many others. Contact us to know more about how Kristal.AI can help with your investment needs.