When someone says investing, we instantly think of stocks, SIPs, Mutual funds, etc. But some investment assets are not affected by the ups and downs of the stock market graphs. And investing in these alternative assets is an important step towards financial freedom!
Let’s understand alternative investments in detail – Alternative Investments offer higher returns, lower correlations, and the opportunity to invest in areas that may not be available through other investment strategies. Diversification is one of the main reasons why many investors go for alternative investments.
These assets are generally privately held and thus the volatility is very low here. Stock markets are very unpredictable even in a stable economy, and alternative assets are a great way to save your investments from the swings of the public market.
Let’s say you own a property that you have rented to a tenant. Now the rent of your property will remain unaffected by the ups and downs of the market. Thus, it becomes an alternative investment.
They are also an excellent way for institutions to build and protect their portfolios. Investing here is like making an investment portfolio away from traditional investments, which consequently reduces overall portfolio risk. Volatility may not be a reason for a long-term investor to put his money here but what one should keep in mind is that volatility kills compounding. If you are waiting for 10-20 years to get on an average of 10 per cent returns, and in the middle of these 10 years market crashes keep happening, your returns will also get affected deeply.
Alternative assets have the potential to offer much higher returns than their traditional counterparts. This is also one of the primary reasons why investors are attracted to it. Although the results are not guaranteed, the potential of getting much higher returns than usual stocks is very high.
There is also a sense of direct ownership. Suppose you own some stocks of a wine company, that doesn’t mean that the company is yours and you can make the decisions for that company. Now, contrary to that, if you are owning a bottle of wine, you get a sense of complete ownership. You get to make all the necessary decisions related to that investment.
One can also enjoy tax benefits by investing in alternative assets. With many alternative investments, you get to keep more of your profit because of the structure.
It is also considered a category of investment strategies that are based on the assumption that the traditional investment capital markets are inefficient and often mispriced. This is true in many cases. With alternative investments, you get the true value of the things that you own without risking their value in the market.
Here’s why they are a smart choice for portfolio diversification.
You can own a bottle of wine, keep it for as long as you want and then sell it at a much higher price. This is because the value of wine appreciates as time passes. Wine is valued based on its scarcity, blend, the reputation of the label, and longevity, so keep these in mind before making any moves.
What started with a few million, is now around a $5bn market; that is about 65 per cent higher than a decade ago. And the market continues to grow more. Even in extreme situations like the Covid-19 pandemic, the performance of wine investments was not affected as it is independent of the financial crises.
The same is the case with investment in whiskey. Its value increases as it ages. Many people like to make a collection of limited-edition branded Whiskeys and are willing to bid a good amount for each bottle. The rarer more scarce your bottles are, the higher is their value.
The value of whiskey depends on its age, bottling date, distillation year, and label reputation. This investment is also independent of any financial crisis.
Wine and Whiskey are one of the rare alternative investment classes that are picking up trends in recent times.
Here are other unheard alternative investment assets are:
1. Music Royalties: Help an artist in making his song, own certain rights over the music royalties and you get to earn every time that song is played.
2. Art: People are ready to pay an insane amount of money for art and paintings. Own paintings for a lower amount at auctions and sell them to the person who falls in love with them. They will surely pay you whatever you ask to buy their favorite paintings.
3. Litigation Finance: This is like making money through other people’s lawsuits. You help a plaintiff with the finances of filing the case like transportation, lawyer fees, etc, and then earn a percentage from the claimed money that he gets if he wins. The only thing to keep in mind is that if he loses, you lose all your money.
(The article is written by Chitra Kadam, Financial Engineer, Hedonova)