In the investment world, ‘Diversify’ is the mantra on every potential and experienced investor’s lips and we could not agree more on this. A diversified investment portfolio is more important than ever considering the current market scenario.
However, diversification has varied connotations across classes of investors, based on their risk appetite, financial goals and level of expertise when it comes to making a diversified investment portfolio. While, regular investors are happy to be diversify through plain equities, bond and mutual funds, the High Net Worth individuals and institutions want diversification with a tiara of exclusivity. This is where Alternative Investments find their place.
Alternative investments continue to grow in popularity and are making the way into the portfolios of retail investors as one of the better ways to earn higher returns and eventually make more money. It is more complex than traditional investment policies. Most financial advisors agree that alternative investments are best when used for the diversified financial portfolios from traditional funds. Alternative investments typically don't relate to the stock market, it refers to any asset other than stocks, bonds, or cash. Real estate, private equity, infrastructure, hedge funds, commodities, and venture capital are some of the most well-known and invested in alternatives, and you could always consult a wealth advisor before beginning or opting for alternative investments.
With the emergence of alternative assets, the investment arena is booming with options to earn higher returns like never before. Diversification and higher returns define the essence of alternative investments and one needs to put in thorough due diligence before parking funds in them. Simply defined, Alternative investments are those asset classes that vary from traditional investments on grounds on complexity, liquidity, regulatory mechanism and mode of fund management.
There is a quite popular belief that hedge funds and private equity funds are considered to be very risky investments and a wealth advisor would be able to explain it in detail as well. Of course, this point of view may be right, only when these funds are viewed as an independent investment. Nevertheless, in the context of total portfolio, these investments appear to have great diversification benefits.
There are 4 Benefits of Alternative Investments for your diversified investment portfolio
1. Alternative Investments have diversified potential - The popular belief that hedge funds and private equity funds are extremely risky investments to make more money on a standalone basis is justified to great extent. There are many types of alternative assets have great diversification potential and would make for a great diversified investment portfolio, for individuals with varied financial needs and goals alike.
2. It is a Hedge against Inflation - Some alternative asset classes are a good inflation hedge and can offer diversity in the investment world unlike many other fixed returns products. Commodities are also example of a good inflation hedge.
3. Alternative Investment has new Exposures and Opportunities - There are plenty of opportunities to find new exposures. Besides stocks and bonds, someone can invest in commodities, infrastructure, real estate projects, or start-up business ideas.
4. It has Higher Returns possibilities - Some kinds of alternative investments are very risky on a standalone basis, but investors are rewarded for this risk by higher returns. Some kinds of alternative investments are very risky on a standalone basis, but investors are rewarded for this risk by higher returns.
Now the question is why people will think about the alternative investment. Because the benefits of adding alternative investments, besides the reason that everyone wants to make more money, to a portfolio are so significant that many investors invest in alternative assets in spite of the difficulties that investing in alternative assets represents. These problem includes low liquidity, difficulty in price making and to make a benchmark, legal constraints, and costly due diligence process. Like any other investment, the rate of return for the investment is not guaranteed here, but there is potential for it to be higher than that of traditional investments.
Nowadays many of the emerging economies are switching to the new trend, from a savings-oriented approach to an investment approach, making themselves more attractive to investors who seeks new opportunities. This kind of investments have the potential of offering investors high returns. However, with traditional investments, the returns on alternative investments also vary over time depending upon various factors.