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 unleashed an economic fiasco across global markets not just renewed the old wounds, but rendered a far more damaging impact on the economy. Interestingly an overarching likeness between the two incidents is the manner in which investors reacted and tweaked their investment strategy in an attempt to insulate their investments while pre-empting for similar catastrophes in the future. In these unprecedented times while some panic and indulge in a selling spree, others view events like a market collapse as an opportunity to venture into newer areas of investing.
Another case in point – Bank FDs are considered the safest and most preferred risk free-investment option. However, the pandemic era has compelled investors to re-think their investment strategy. According to RBI data, average interest availed on bank FDs is 5.6% while the current inflation rate is hovering at 6%. This means we are actually losing out on 0.4 percent annually. This therefore implies that investors need to incorporate high return-oriented asset classes in their portfolio that can offer inflation-beating returns.
While alternative investments as a concept have been in existence since time immemorial, and have grown and evolved over a period of time while gaining substantial prominence during challenging times such as the 2008 crisis or the pandemic. Extended periods of low interest, inadequate returns and market volatility among others have inspired investors time and again to venture into these less traversed areas. Thanks to technology and new-age digital platforms offering better access to niche investment areas, the past decade has witnessed the rise of new-age alternative assets that are rapidly growing into mainstream asset classes.
Challenges exercising setback
Unlike traditional assets, alternative assets largely are not publicly traded and are typically owned 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 time periods owing to which investors may not have the leeway to exit them at a determined time. Moreover, due to lack of current and historic data in the public domain and in the absence of an appropriate market price, valuations may get complicated.
New-age platforms driving the tech shift
The asset management landscape is undergoing a radical shift. With technology as its heart and digitisation as its blood, new-age wealth platforms are offering alternative assets sans the traditional bottlenecks. While they may serve markets across the globe, these platforms are extremely focused in terms of the market segment they choose to target and therefore offer highly tailored products suitable and alluring to the market segment they cater to. As these platforms grow and expand they are investing more time and energy in expanding their customer base so as to access the discrete pool of funds. Additionally they are rapidly extending their product suite to cater to the entire life cycle of their customers. Platforms offering alternative investment avenues with their tech-backed best practices are empowering customers to make well-informed decisions whilst offering world-class experience, unlike the traditional investment platforms.
Global Equities – Going by the thumb rule of investing – a well-diversified portfolio can help mitigate risks. With platforms offering the opportunity to build a portfolio spread across geographies, investment in global equities has become a sought after asset class. One of the key benefits the asset offers is with global corporations spread across geographies, investments are far more insulated in case of a flash crash or an economic collapse in a particular market. Investors are therefore increasingly moving beyond local equity markets as they see the benefits that geographical diversification offers. However, global markets can be foreign in more ways than one and it might be difficult for investors to understand market sentiment remotely all the time, so it is advisable to remain extremely cautious and test the waters before diving in.
P2P Lending – New-age P2P platforms offer an automated and transparent platform wherein lenders are connected to borrowers directly, discarding the high cost intermediary which enables lenders to earn more and borrowers to pay less – a win-win for both. While it offers decent rate of interest anywhere between 12-15%, these platforms often come along with the associated risk of defaults and bad loans. However, the platforms are now increasingly working on enhancing tech diversifying products to minimize the risks while increasing the returns. Also by diversifying the portfolio through multiple borrowers the risk is spread across, thereby reducing the impact of delinquency on the part of a few borrowers.
Fractional ownership in real estate – Commercial real-estate is a stable high-yielding asset, however owing to the huge ticket size, lack of expertise, lack of data and transparency among others, it has always remained restricted to HNIs, Private Equity firms and family offices. New-age tech-backed platforms are bringing about a radical shift to CRE as an asset class. They scour hundreds of properties, measure dozens of parameters to zero in on best combination of yield, stability, and value appreciation. They enable investors to own and sell fractions of pre-leased, Grade-A commercial properties to earn rentals (passive income) in the range of 10% to 14% besides enjoying capital appreciation. However, the underlying rule of successful investment in fractional ownership is having it as a long term venture. Any investment in fractional ownership needs a maturity period generally upwards of 5 years to see decent returns.
While residential properties offer yields in the range of about 2-3%, Bank FDs offer around 5-6%. Therefore by reducing capital requirement, bringing in expertise, improving liquidity, and offering the dual advantage of earning rental income and capital appreciation, these platforms are building CRE into a popular asset class like never before. Today retail investors can pick and invest in a wide variety of assets – office spaces, warehouses, SEZ etc.
Cryptocurrencies – 2021 would be considered as a watershed year for cryptocurrencies. Besides banks and companies announcing their own crypto endeavors, the year also witnessed institutional interest in Bitcoin accelerate at an astounding rate. Just a decade old Crypto and Bitcoin in particular is now being compared to traditional investment assets such as Gold. Today investors are not just indulging in trading but are open to multiple alternative avenues such as dollar-cost averaging or SIP. Through crypto exchanges, investors can SIP into a host of cryptocurrencies such as Bitcoin, Ethereum, among others. Crypto has been under lots of volatility and while currently it is dwindling, this asset class has a promising future with the emerging Blockchain technology and its growing implications.
Future of Alternative investments
With the world growing closer through technology and digitisation, there has been a substantial growth in newer investment avenues and opportunities. By offering easy access, transparency and asset management solutions on the go – through an app or a user-friendly dashboard, new-age wealth-tech platforms are championing a transformation of the traditional investment landscape. This will in turn have a cascading impact on traditional investment avenues as well. World-class asset management organisations that offer ‘value investing’ will become a necessity rather than a luxury. Therefore, new-age wealth platforms will need to invest a substantial portion of their time energy and resources to build tailor-made products and sharp strategies that will enable them to target specific consumer cohorts and thereby access distinct wealth pools.
(By Sudarshan Lodha, Cofounder & CEO, Strata Property Management)
Disclaimer: This is the personal opinion of the author. Readers are advised to consult their financial advisor before making any investment.