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Alternative investments: championing the transformation of the investment landscape

The financial crisis of 2008 and the great recession that followed it are apparently well etched in the memory of most investors. A decade later, the Covid-19 pandemic that triggered an economic fiasco in global markets has not only renewed old wounds, but had a far more damaging impact on the economy. Interestingly, an overall resemblance between the two incidents is how investors reacted and changed their investment strategy in an effort to insulate their investments while anticipating similar disasters in the future. In these unprecedented times, while some are panicking and going on a selling spree, others are viewing events like a market meltdown as an opportunity to venture into new areas of investing.

Another example, bank FDs are considered to be the safest and most preferred risk-free investment option. However, the pandemic era has forced investors to rethink their investment strategy. According to RBI data, the average interest on bank FDs is 5.6%, while the current inflation rate hovers around 6%. This means that we are actually losing 0.4% per year. This therefore implies that investors should integrate into their portfolio high-yielding asset classes that can offer returns above inflation.

While alternative investments as a concept have been around since time immemorial, they have grown and evolved over time while gaining considerable prominence during difficult times such as the 2008 crisis or the pandemic. Prolonged periods of low interest rates, insufficient yields, and market volatility, among others, have repeatedly prompted investors to venture into these less traveled areas. With technology and new-age digital platforms offering greater access to niche investment areas, the past decade has seen the rise of new-age alternative assets that are rapidly expanding across asset classes. mainstream assets.

Backhand Exercise Challenges

Unlike traditional assets, alternative assets are generally not listed on a stock exchange and are usually held by institutions. This is one of the reasons why access to these assets has been restricted to HNIs, NRIs and institutional investors, among others. They also lack liquidity and come with exit delays due to which investors may not have the leeway to exit at a certain time. Additionally, due to the lack of current and historical data in the public domain and the absence of an appropriate market price, valuations can become complicated.

New-age platforms driving the technological shift

The asset management landscape is changing. With technology as their heart and digitalization as their blood, new-age wealth platforms offer alternative assets without the traditional bottlenecks. Although they can serve markets all over the world, these platforms are extremely targeted in terms of the market segment they choose to target and therefore offer highly personalized products tailored and appealing to the market segment they cater to. . As these platforms grow and grow, they invest more time and energy in expanding their customer base in order to access the discrete pool of funds. Additionally, they are rapidly expanding their product line to meet the entire lifecycle of their customers. Platforms offering alternative investment paths with their technology-supported best practices enable clients to make informed decisions while providing a world-class experience unlike traditional investment platforms.

Global Equities – Follow the rule of thumb when it comes to investing – a well-diversified portfolio can help mitigate risk. With platforms offering the ability to build a portfolio spread across multiple geographies, investing in global equities has become a sought-after asset class. One of the main advantages of the asset is that with global companies spread across multiple geographies, investments are much more insulated in the event of a flash crash or economic meltdown in a particular market. Investors are therefore increasingly looking beyond local stock markets as they see the benefits of geographic diversification. However, global markets can be foreign in more ways than one and it can be difficult for investors to understand market sentiment from a distance all the time, so it is advisable to remain extremely cautious and test the waters before diving in. .

P2P loan – New era P2P platforms provide an automated and seamless platform where lenders are directly connected to borrowers, eliminating the costly middleman that allows lenders to earn more and borrowers to pay less – a win-win – winner for both. Although they offer a decent interest rate between 12 and 15%, these platforms often come with the associated risk of defaults and bad debts. However, platforms are now increasingly working on improving technology diversification products to minimize risk while increasing returns. Additionally, by diversifying the portfolio through multiple borrowers, risk is spread, reducing the impact of delinquency by a few borrowers.

Joint ownership in real estate – Commercial real estate is a stable high-yield asset, but due to the huge ticket size, lack of expertise, lack of data and transparency, among others, it has always remained limited to HNIs, Private Equity companies and family offices. New age technology backed platforms are driving a sea change towards CRE as an asset class. They sift through hundreds of properties, measuring dozens of metrics to zero in on the best combination of yield, stability and value appreciation. They allow investors to own and sell fractions of pre-leased Class A commercial properties to earn rentals (passive income) in the range of 10% to 14% in addition to enjoying capital appreciation. However, the underlying rule of a successful condominium investment is to have it as a long-term business. Any condominium investment requires a maturity period usually greater than 5 years to see decent returns.

While residential properties offer returns in the range of around 2-3%, Bank FDs offer around 5-6%. Therefore, by reducing capital requirements, providing expertise, improving liquidity and offering the dual benefits of generating rental income and appreciating capital, these platforms make CRE an asset class popular like never before. Today, retail investors can choose and invest in a wide variety of assets – office space, warehouses, SEZs, etc.

Cryptocurrencies – 2021 would be considered a pivotal year for cryptocurrencies. Along with banks and corporations announcing their own crypto efforts, the year also saw institutional interest in Bitcoin accelerating at an astonishing rate. Crypto and Bitcoin, only ten years old, are now compared to traditional investment assets such as gold. Today, investors are not content to just indulge in trading, but are open to multiple alternative avenues such as Averaging or SIP. Through crypto exchanges, investors can SIP into a host of cryptocurrencies such as Bitcoin, Ethereum, among others. Crypto has seen a lot of volatility and although it is currently declining, this asset class has a promising future with the emerging Blockchain technology and its growing implications.

The future of alternative investments

With the world ever closer together through technology and digitization, there has been a substantial growth in new investment avenues and opportunities. By offering easy access, transparency, and asset management solutions on the go – via an app or user-friendly dashboard, new era wealth management technology platforms are championing a transformation of the asset landscape. traditional investment. It will also have a cascading impact on traditional investment avenues. World-class asset management organizations that offer “value investing” will become a necessity rather than a luxury. Therefore, new age wealth platforms will need to invest a significant portion of their time, energy and resources to create tailored products and cutting-edge strategies that will enable them to target specific consumer cohorts and thus access separate pools of wealth.

(By Sudarshan Lodha, Co-Founder and CEO, Strata Property Management)

Disclaimer: This is the personal opinion of the author. Readers are urged to consult their financial advisor before making any investment.


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