As India continues to grow in leaps and bounds, investors have started to look out for options beyond the traditional investment to support their growth trajectory. This is probably the primary reason why Alternative Investment Funds (AIF) have gained traction in the country.
While alternative investment isn’t a new concept, it is slowly gaining momentum and popularity among investors. The past couple of months, investors have witnessed an increased degree of uncertainty in the financial market. In fact, with the rising interest rate, and the market showing signs of fatigue, investors are finding AIFs as an excellent way to diversify their portfolio. It provides higher returns, along with some level of investment protection.
Since alternative investments are usually not associated with the traditional investment instruments, they are considered as good hedges against inflation. Considering the fact that AIFs were launched in 2012; the sector has mushroomed into $25 billion industry, consisting more than 500 registered funds. The fact is that AIFs provide an excellent opportunity to boost and diversify a portfolio. In light of this, here are five reasons why investors are increasingly investing in AIFs.
Diversifies Your Portfolio
Once used by large institutions and endowments, alternative investments have rapidly turned mainstream in the past couple of years. Since they are an excellent way to enhance portfolio security, alternative investments are gaining popularity among investors. A diversified portfolio aims at providing high returns at low risk by investing in a wide array of assets that would respond differently to the same market events.
AIFs come with low correlation to conventional asset classes like bonds, stocks, gold, and more. As such, adding them to the investment portfolio can lessen the volatility factor without losing on return. Diversification is one of the key reasons why some types of institutional investors (including pension plans, endowments, or foundations) invest in alternative assets.
Diminishes Portfolio Volatility
Investing in conventional modes of securities implies that investors can focus on absolute return without any significant risk of volatility. Adding alternative investment with no interrelation and high returns significantly reduce risk. It helps reduce the hazard associated with market fluctuations and other unfortunate economic events. By doing so, an investor can minimise volatility levels, ultimately enabling a safe and stable investment portfolio.
Explores Unconventional Asset Classes
AIFs deal with certain asset classes which consist of different market characteristics. This leads to higher returns as the market risk reduces substantially.
Provides New Exposures and Opportunities
Being diverse in nature, alternative investments bestow investors with ample opportunities to find asset classes and commodities that are not accessible with traditional modes of investments. Besides stocks and bonds, an investor can choose to invest in commodities, real estate projects, or start-up business ideas. These days, there are a lot of alternative investment options available to increase returns exponentially, for instance, P2P lending, private equity, hedge funds, real estate, crowdfunding, invoice discounting and more.
Given the current market scenario, market volatility is most likely to continue to be a pain point for investors. And, heading into such a situation, it is imperative for investors to stay focused and continue to look for alternative investment opportunities to diversify their portfolio.