“Diversification” is the word on every investor’s lips today, and we couldn’t agree more. However, diversification holds a different meaning for each individual. Regular investors prefer diversifying their choices among bonds, equities and mutual funds, whereas, investors with higher net worth prefer diversifying through investing in something other than these.
This is where alternative investments come to play. Who doesn’t like to have choices, and with the emergence of these investment strategies, the investment sector is wide with choices like never before.
Past investment methods and strategies have started to show losses in today’s financial arena. Where earlier, by having a decent portfolio one had a share of good amount of dividends, these days are now on the verge.
This means that one should prepare for some ways to counter the losses in the traditional investments sector. It is, therefore, time to consider and understand the importance of a few alternative investments, which would keep one’s money revolving and providing acceptable returns.
What exactly is alternative investment?
An alternative investment is one such asset which is not of the conventional type, for example, stocks, bonds, and cash. They are investments which go beyond traditional ways of investing, and tend to behave differently from typical stock and bond investments. By adding alternative investments to one’s portfolio, better returns can be availed due to diversification.
What advantage do alternative investments hold?
Investing in alternatives adds diversification to one’s portfolio. Nowadays, it is imperative to have a diversified portfolio spread across various investments because each one performs differently. Each investment is differently affected by the economic and market factors. Owning different types of investments can help you stay organized and also reduce the chances of unexpected risks and losses.
Alternative investments also act as a hedge tool against market volatility, as they are not directly linked to the performance of business markets. They act as a safety net during times of market crashes and inflation. When one’s business suffers any unnatural losses, alternative investments come up to combat the effect.
Short term investments require huge amounts of turnover, leading to high transaction costs. Hence, their benefits are often offset by the huge costs. Alternative investments, on the other hand, are not subject to high transaction and maintenance costs, and therefore benefit more to the investors.
Alternative investments provide certain tax benefits and are subject to long-term capital gains. As a result of their liquidity, these investments provide a hedge against huge taxes.
Types of alternative investments
Investing in commercial and residential properties is considered a profitable venture for a long term investment strategy. One can purchase properties for rentals and earn consistent monthly incomes from them.
One can also purchase properties below market value, and sell them in times of price rise. One can take advantage of the tax deductions received by investing in real estate.
There are more private companies than public companies, and investors should take advantage of this fact. Private equity is a broad term for investments in the private capital markets.
These companies raise funds and take capital from both traditional and conventional institutes of finance. The finds are then used to invest in promising private ventures. This alternative source of investment is a great tool for earning additional wealth.
Peer to peer lending:
This form of investments is the most famous and has revolutionized the lending and borrowing markets. It has allowed loans to be offered without technically going to the banks. It allows the investors to put money of their low yield savings and accounts to better work. With peer lending, there may be a risk to one’s returns. But these are taken care of by the online portals through which one meets the borrowers.
When one becomes a peer lender, there are chances of achieving higher returns, than would have been possible in a low interest savings account. Also, one has the freedom to choose the borrower and the purpose one wants to serve through funding loans.
There are various portals offering P2P services, and investors must get hold of these alternative investments on offer. P2P lenders offers online lending services, and acts as a meeting place for borrowers and lenders. It matches the borrowers with investors, and helps facilitate transactions between them.
The investors have the liberty to take control and decide on each loan one makes, as per one’s level of risk taking and expected rate of returns. It is achievable to earn interest rates ranging 5-9% through peer lending websites, and should definitely be adopted as an alternative investments strategy.
Moreover, with no intermediary costs involved in the process, the investors often get improved returns and hence prefer investing through peer lending. This way they can put their extra wealth to good use and help their money make more money.