Gold, equities, mutual funds, and fixed deposits are frequently the first things that spring to mind when we think about investments. However, investors are beginning to take notice of an entire realm outside of these conventional options: alternative investments.
Particularly among high-net-worth individuals (HNIs) and astute investors seeking to diversify their portfolios, these unconventional alternatives are growing in popularity.
Alternative investments provide a means to think outside the box and maybe increase returns, from hedge funds and real estate to venture capital and even buying artwork or antiques.
An Alternative Investment: What Is It?
Financial instruments that go beyond conventional options like stocks and bonds are referred to as alternative investments. These consist of invoice discounting, fractional real estate, secured bonds, P2P lending, and securitized debt instruments.
The potential for larger returns, which frequently range from 9% to 14%, is what distinguishes these investments. These opportunities have special risks even if they have the potential to be very profitable.
Given the abundance of options accessible today, it’s crucial to thoroughly evaluate each one before making a commitment because they might not be as simple as more conventional investments.
India’s Alternative Investment Types
Beyond conventional stocks and bonds, India has a range of other investing options. The purpose of these alternatives is to assist investors in diversifying and investigating greater returns at different risk levels.
Secured Bonds for Seniors:
These bonds are comparatively safer because they are secured by collateral. They are perfect for investors who are risk averse and offer fixed returns.
Securitized debt instruments, or SDIs:
give investors the opportunity to profit from loans given to small companies. Although they carry a risk based on borrower repayments, they have the potential to yield larger rewards.
Leasing of Assets:
In order to generate rental income, investors finance vehicles or equipment that firms lease. By serving as collateral, the assets provide an additional degree of protection.
Discounting Invoices:
financing short-term loans to companies that are backed by their outstanding invoices, investors are able to profit.
Peer-to-peer lending:
Investors make direct loans to people or companies in exchange for interest. Although this kind of lending is riskier, it may yield substantial rewards.
fractional real estate:
High-value commercial properties are jointly owned by fractional real estate investors, who profit from property appreciation and rental income.
How Can Alternative Investment Products’ Risk Be Assessed?
It can be challenging to evaluate risk in alternative investments, but it is easier to do so when you break it down into a few easy steps.
- Determine the likelihood that you will lose your money first.
- Next, think about the ease of selling or withdrawing your investment.
- Additionally, find out whether the product is regulated and whether the distributors and company are reliable.
- Finally, investigate any dangers unique to the investment.
You can make smarter decisions and have a better understanding of the risks by following these steps.
Senior Secured Bonds :
Particularly on internet marketplaces, secured bonds are a well-liked alternate investment choice. Secured bonds can generate double-digit yields, frequently between 10% and 11.5%, in contrast to conventional fixed-income instruments like government and corporate bonds, which offer interest rates of about 6–8%.
These bonds are backed by collateral, typically loans from Non-Banking Financial Companies (NBFCs), as the word “secured” suggests. “Senior” refers to the fact that, in the event of the issuer’s insolvency, investors have the largest claim of any bondholder.
Bond Type |
Average Yield |
| Corporate and Government Bonds | 6% – 8% |
| Secured Bonds for Seniors | 10%-11.5% |
It’s critical to comprehend the dangers associated with secured bonds. The following are five important risk variables to consider:
1. Principal Loss:
Even if collateral supports secured bonds, losing your principal is still a possibility. A moderate to adequate risk level is indicated by the credit ratings of many issuers, which are in the range of A or BBB.
These ratings often have default rates of less than 2%, but when they do occur, it may take some time to get your money back.
2. Risk to Liquidity:
Although the secondary market for secured bonds is underdeveloped, they are frequently listed on stock exchanges. This implies that when you want to sell your bond, you might have trouble finding a buyer and, if you do, you would have to offer a lower price.
3. No Risk of Regulatory Oversight:
The RBI oversees secured bond issuers, mostly NBFCs. However, until SEBI implemented regulations for Online Bond Platform Providers (OBPP) in November 2022, many online platforms that sell these bonds were unregulated.
Therefore, as an investor, be sure that the platform you are working with is registered with the National Stock Exchange or the Bombay Stock Exchange.
4. Risk Particular to a Platform:
Exclusive bond offerings are frequently available on online platforms, which perform due diligence before making them available to investors. These platforms, however, are not responsible for issuer defaults.
Even if there haven’t been any notable defaults yet, it’s crucial to limit your investment portfolio to regulated platforms.
5. Risk Specific to Instruments
Investing in these bond issuers is riskier because the majority of them don’t have the best credit ratings. Although security is provided by the issuer, 100% recovery in the event of default is not guaranteed. Choose issues with shorter tenures to reduce the risk.
Instruments for Securitized Debt
Although the idea of securitized debt instruments is not new, ordinary investors can now access them through online bond platforms.
Through these products, loans from Non-Banking Financial Companies (NBFCs) are transferred to a trust, which then distributes the payback to investors.
Let’s look at the main risk factors for SDIs:
1. Principal Loss:
Borrowers, not the NBFC, bear the risk of capital loss. Platforms do, however, provide extra security in the form of guarantees (e.g., personal guarantees or fixed deposits). Partial loss is possible even with collateral, although the risk is reduced by the dual protection.
2. Risk to Liquidity:
Although stock exchanges frequently list SDIs, the secondary market is not very liquid. A buy-and-hold approach is advised for investors because it may be challenging to sell in the middle.
3. No Risk of Regulatory Oversight:
Depending on whether banks or NBFCs are engaged, securitization regulations are enforced by both SEBI and the RBI. A safer investing environment is ensured by these regulations, which lower the oversight risk.
4. Risk Particular to a Platform:
Now that online bond platforms are regulated by SEBI, platform-specific hazards have been greatly decreased. To reduce danger, it’s still crucial to make sure you choose platforms that abide by these rules.
5. Risk Specific to Instruments:
Even though SDIs provide further security in the form of guarantees and collateral, they cannot provide a 100% recovery in the event of default. This implies that you may still sustain losses even though you have dual security (the asset plus an extra assurance).
Leasing of Assets
Companies can raise money by leasing out assets (such as machinery or cars) through asset leasing. With the leased assets serving as collateral, investors profit by collecting lease payments.
Let’s examine the dangers:
1. Principal Loss:
Asset leasing instruments are assessed according to the quality of the underlying assets, just like SDIs. Additional assurances, such as property or personal guarantees, are frequently offered by platforms. Even while the collateral reduces risk, there is still a danger that some of the investment could be lost.
2. Risk to Liquidity:
Although asset leasing instruments are listed on stock exchanges, there isn’t much of a secondary market for them. You should be ready to keep onto your investment for the duration, just like with SDIs.
3. No Risk of Regulatory Oversight:
Depending on the issuer, regulatory monitoring differs. It’s critical for leasing companies to confirm whether they are governed by the RBI or another regulatory agency. Some leasing companies might function with less regulation even while securitization standards are in place.
4. Risk Particular to a Platform:
Bond platforms are governed by SEBI, which lowers platform-specific risks. But it’s crucial to do extensive study before making an investment.
5. Risk Specific to Instruments:
Even though these instruments are backed by extra assurances, there is no assurance that you will get your money returned in full in the event of default.
Discounting Invoices
Businesses use invoice discounting as a financing strategy to cover their short-term financial demands by selling their outstanding invoices at a discount.
For instance, a merchant sells items to a big business, but the money doesn’t come in for ninety days. The trader sells the invoice to a lender (such as a bank or NBFC) for a marginally reduced sum in order to manage cash flow. The financier receives the money right away and collects the full payment later.
This idea is combined with several invoices and offered to investors on internet marketplaces.
Let’s examine the dangers:
1. Principal Loss:
The fundamental risk is the potential for the buyer (such as a big business like ITC) to postpone or fail to make the payment. There is no assurance that you won’t lose some of your money, even though financiers review the companies and bills. Nonetheless, the pool structure aids in distributing the risk among several invoices.
2. Risk to Liquidity:
The secondary market for invoice discounting is still in its infancy, despite the fact that these invoices contain a specified payback schedule (such as 30, 60, or 90 days). Selling your investment before it matures could be difficult for you as an investor. Put simply, you will probably have to keep the investment until the money is received.
3. No Risk of Regulatory Oversight:
For added security, SEBI oversees invoice discounting platforms, just like it does other instruments. But be sure the platform you utilize is legally compliant and appropriately registered.
4. Risk Particular to a Platform:
Although platforms review and choose the invoices, they do not bear liability for losses in the event of an error. Although these sites conduct extensive inspections, it’s important to confirm their legitimacy.
5. Risk Specific to Instruments:
The short-term nature of bills lowers the possibility of protracted defaults. Invoice discounting does not, however, provide complete recovery in the event of non-payment, much like other alternative investments.
Lending from Peer to Peer
P2P lending, or peer-to-peer lending, has grown in popularity as an alternative investment. It is a fairly simple notion. It enables people to use online platforms to lend money directly to borrowers.
Let’s examine the main dangers of peer-to-peer lending:
1. Principal Loss:
There is always a chance that a borrower may default in P2P lending, which would result in a loss of cash. Since you are dependent on each borrower’s repayment, lending directly to them carries a higher risk. Most platforms split your money across several borrowers in order to lower this risk.
On the other hand, lending to the platform itself carries a lesser risk, while there is still a chance that it could fail. To reduce risks, it’s critical to look at the platform’s credit rating and choose shorter investment terms.
Common models that P2P platforms adhere to
Model of P2P Lending |
Type of Lender |
The Distribution of Money |
Level of Risk |
The amount of liquid |
| Straight to the P2P Network | P2P Platform → Investor | Multiple borrowers are distributed by a P2P platform. | Reduced (because of diversification) | A few possibilities for liquidity |
| Straight to the Borrowers | Borrowers → Investors | provides money directly to individual borrowers | Increased exposure to every borrower | No liquidity until the loan’s term is over |
2. Risk to Liquidity
Liquidity is an issue if you lend money directly to borrowers. Until the loan matures, you will not be able to take your money out. The platform may begin a recovery process in default situations, but there is no assurance that you will receive your entire investment returned.
However, there is more flexibility to liquidate your investment if you invest directly with the platform, providing a certain level of liquidity.
3. No Risk of Regulatory Oversight
P2P systems are regulated by the RBI, which offers some degree of supervision. This gives investors some protection, even though it doesn’t completely remove the hazards.
4. Risk Particular to a Platform
Some P2P systems are better governed than others, despite the fact that they are all regulated. Examining the platform’s Non-Performing Assets (NPAs) and financial health is crucial before making an investment. This might help you better understand the risk profile of the platform.
5. Risk Specific to Instruments
In addition to what we have already covered, P2P does not carry any instrument-specific risk. Diversify across platforms and borrowers to spread the risk.
Real Estate Fractional
Co-owning a property is possible with fractional real estate. This implies that investors pool their funds to co-own upscale properties, such as office buildings.
You benefit from both the rent, which may be between 6 and 8%, and the property appreciation, which may be between 4 and 8%. Therefore, you have a decent chance of earning up to 10% if you remain invested for the long run. But there are risks associated with rewards.
Let’s now use our approach to assess this product.
1. Principal Loss:
In hard economic circumstances, it can be hard to locate tenants, which affects rent and property values. However, this risk is moderate as India’s economy expands.2. Liquidity threat
2.Real estate has an essential liquidity threat:
With fractional power, you must check the cinch- in period. subsequently, dealing your share depends on chancing a buyer, and there are no guarantees.
3. No Regulatory Oversight Risk:
presently, platforms offering fractional real estate are n’t regulated. still, SEBI has introduced rules for Small and Medium REITs( SM REITs), which will add oversight and liquidity by allowing asset rosters on stock exchanges.
4. Platform-Specific threat:
Not all platforms are inversely managed, and fraud or mismanagement can be a concern. still, Sebi’s SM REIT regulations should change this. therefore, it’s wise to stay for SM REITs to offer a safer investment option.
5. Risk Specific to Instruments
While rental income yields consistent profits, property appreciation necessitates a sustained investment. Furthermore, investor voting is frequently used to make important decisions, so your returns may be impacted by the majority rule.
Type of Risk |
Principal Issue |
| Principal Loss | Tenant recruitment is challenging during recessions. |
| Liquidity Risk | Selling property shares can be challenging. |
| Absence of Regulatory Monitoring | Regulation is lacking, but SM REITs might make this shift. |
| Risk Particular to a Platform | Platforms that are dishonest or poorly managed |
| Risk Specific to Instruments | Holding for a long time is necessary for capital growth. |
Alternative Investments’ Benefits and Drawbacks
Alternative investments carry dangers including platform-specific challenges and liquidity problems, but they also present intriguing prospects like diversification and better returns. They are best suited for experienced investors who are familiar with intricate financial items, even though they can be a wonderful hedge.
Advantages |
Disadvantages |
| Growth-oriented investors find alternative investments appealing due to their increased returns. | Because of the nature of the investments, they have a greater chance of losing principal. |
| By exposing investors to non-traditional assets, they aid in portfolio diversification. | Since these investments are more difficult to sell immediately, liquidity may be a problem. |
| Investors have access to special opportunities and specialty marketplaces that aren’t found in conventional markets. | Risk is increased by the fact that many of these investments are not adequately regulated. |
| They can provide stability during erratic periods by serving as a hedge against market volatility. | There are platform-specific risks, including management issues and transparency. |
| Some offer passive income prospects, including fractional real estate rental income. | These investments are not appropriate for novices since they demand a profound understanding. |
Alternative Investments’ Tax Consequences
It’s critical to comprehend the tax ramifications of investing in alternative assets.
- Capital Gains: The capital gains tax applies to profits from alternative investments, such as fractional real estate. Long-term gains (after 36 months) are taxed at 20% with indexation benefits, whereas short-term gains (kept for less than 36 months) are taxed at your ordinary income tax rate.
- Fractional real estate rental or lease income: is taxed like regular income, added to your total income, and taxed according to your income tax slab.
- Tax Variations: The tax treatment of various alternative investments may differ. For example, the taxation of securitized debt products may differ from that of asset leasing.
- Impact on Returns: It’s critical to incorporate tax considerations into your investment planning because taxes have the potential to reduce your total returns.
The bottom line
In conclusion, asset leasing and SDIs are examples of non traditional investments that carry a high risk but can yield appealing rewards. Diversification across platforms and goods is crucial, and emergency money should not be used for these investments.
Increase your investment gradually after starting small and becoming accustomed to the hazards. These products are not appropriate for novices seeking their first investment; rather, they are best suited for seasoned investors.
