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As equities tank, turn to alternative investments for better returns

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As equities tank, turn to alternative investments for better returns

By Subhashish Bhadra

After reaching record heights in October last year, Indian equity markets have fallen by over 15 percent. Rising inflation and interest rates have eroded investor wealth, with Thursday alone seeing cumulative losses of Rs. 5.3 lakh crore at the bourses. Nearly 10% of an average Indian household’s wealth is in mutual funds, and this capital will now look for greener pastures. Some experts have begun warning that cash is the only place to hide in a bear market. But are they right?

Not quite. As per SEBI, investments in alternative investments touched the ₹2 lakh crore mark during January-March 2021, rising more than 30% over the year despite the effect of the pandemic. This class of investments includes newer assets such as invoice discounting, angel investing, infrastructure funds, social venture capital funds, revenue-based financing, etc.

Hitherto the preserve of the wealthiest Indians, alternative investments are now becoming accessible to ordinary Indians courtesy new-age fintech platforms. These start-ups are using India’s growing digital infrastructure and rising investor awareness to showcase a diversity of new investment options, within the risk frameworks set up by regulators.

How is it different from traditional investments?
The underlying dynamics of alternative instruments often differ substantially from those of traditional assets. For example, while inflation might dent equity markets, some alternative investors might actually benefit from higher inflation. Therefore, alternative assets allow investors to have greater diversification, lower volatility, and reduced risk.

To illustrate this point, let us look at three examples of alternative investment assets. While each of them provides lucrative returns and diverse risk profiles, investors should realise that investments are subject to different kinds of market risks, and they should spend time on understanding these better.

* Commodities
What is it?

Trading in commodities is exactly like trading in stocks, i.e. purchasing when the price is low and selling at a higher price. For example, NSE MCX (Multi Commodity Exchange) lists more than 20 commodities, with oil, gold and metals being the most popular ones. Some national and international exchanges facilitate trading in newer commodities such as marijuana, agricultural products, dry fruits, etc.

How long?
Investors recommend tenures of over a year, owing to market fluctuations. In the longer run, prices of most commodities tend to rise significantly.

How risky is it?
Market fluctuations for commodities traded frequently impacts the futures prices in the commodity, making it a fairly risky investment.

What kind of returns are expected?
Based on data published by NSE, commodity investments over Rs 5 lakhs fetch an average IRR of 25-45%.

Subhashish Bhadra, Director of Capital Platform at Klub

* Invoice Discounting
What is it?

Invoice discounting is a simple alternate investment in which investors provide upfront cash to firms, while recouping their investments when invoices raised by firms to their vendors come due. An invoice is usually traded at a discount, such that the investor makes a profit when it is fully repaid by the vendor.

How long?
Since vendors typically pay their invoices in 45-90 days, invoice discounting is suitable for investors looking for short-term investment products.

How risky is it?
Invoice discounting is considered a safe investment option to safeguard portfolios against market volatility while reaping high returns. This is especially true when the invoice is raised against reputed marketplaces or vendors.

What kind of returns are expected?
Investment products by private players in this space fetch an average IRR of 12-20% for short-term commitments.

* Revenue-Based Financing
What is it?

Revenue-based financing (RBF) is a new asset class where investors provide upfront capital to a company, in return for a share of its future revenues. Since revenues of a company are based on ‘real’ economic factors and are detached from market ‘sentiment’, RBF provides a great diversification opportunity for investors. Retail investors can sign up on multiple industry-validated RBF products and choose from a variety of businesses to invest in, with repayments tied to the revenues of the business.

How long?
Tenures are flexible based on the needs and risk profile of the company, while typically ranging from 12 to 24 months.

How risky is it?
Each company has a different risk profile, and new-age fintech start-ups provide sophisticated risk analysis to guide investors. Investors can track the financials and the industry performance of the company to better understand risk.

What kind of returns are expected?
RBF platforms have generated IRRs ranging from 18 to 28% for their investors.

In an increasingly uncertain world, wouldn’t it be a smart call to shake things up through greater diversification in your investment portfolio and try alternative investments?

(The author is the Director of Capital Platform at Klub, a FinTech start-up that provides India’s first community-backed investment product for revenue-based financing in D2C digital startups. Views expressed are personal and not necessarily that of Financial Express Online)

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