tocks and bonds are the first two items that come to mind when thinking about investments. However, investing is much more than just market-linked investments, with over 81% of ultra-high net worth individuals globally holding alternative and fixed income investments. Retail investors, on the other hand, only have roughly 5% of their investments in alternative products.
While this disparity is likely due to the ultra-rich having access to a wide range of information and alternative investment opportunities, companies such as Monexo are unlocking a plethora of alternative investment products that were previously unavailable to smaller retail investors.
Non-market linked investments are those that do not rely on public equity or tradeable debt markets to generate returns. These could include, among other things, gold, real estate, P2P debt, invoice discounting, commodities, and cryptocurrency.
But why should you use NMLIs to diversify your portfolio? Here are three compelling reasons.
Risk
Traditional investments are always subject to market movement and volatility. As inflation rates and geopolitical tensions rise, the stock market in 2022 will be one of the most volatile on record. If you have taken a direct hit in the 2022 bear market, you will agree that it is prudent not to put all of your eggs in one basket.
Inflation hedge
With inflation levels in Q2 of 2022 at 7%, it remains significantly high compared to the RBI’s target. This highlights the importance for investors to consider assets that offer a safety net against inflation. Traditionally, people have relied on commodities like oil and avenues such as real estate to safeguard the value of their assets, even in high-inflation environments. However, there are numerous alternative possibilities available today, and it is advisable to diversify your portfolio by investing in a variety of inflation-proof assets. Nevertheless, real estate investments do have a significant drawback. Appraising them can be exceedingly difficult, and they often have a protracted sales cycle, making them highly illiquid. This may not be to everyone’s liking.
Some non-market linked investment options are
1. Peer to Peer lending: The principle of peer-to-peer lending is quite similar to how a bank works. Classically, the bank retains the difference between interest paid and interest earned.
The bank also establishes several rules, terms, and conditions about who can borrow, how much can be borrowed, how much interest can be paid, and so on. Modern P2P lending platforms have been created by removing the need for banks from the equation. As a result, investors might receive higher interest rates on their funds. Borrowers can also obtain financing through approval procedures.
In essence, peer-to-peer lending platforms such as Monexo serve as facilitators and risk mitigators.
2. Fractional Real Estate: The fractional ownership platform identifies an investable Grade A property, such as a commercial building or a warehouse, to begin the business model. Many of the listed properties have current tenants on long-term contracts, resulting in cash flow visibility.
Now, because owning such a property would cost a few crores, the portal invites investors to pool funds to finance the asset’s acquisition. The minimum investment is Rs 10 lakh. However, it may alter depending on the platform.
The platform forms a special purpose vehicle (SPV) to acquire the property after pooling funds from different investors. And the investor now owns stock in the company.
Annual asset management fees for fractional ownership corporations are typically around 1%. They also receive a percentage of profits above a certain threshold.
From the standpoint of an investor, the owner receives a monthly rental income with built-in rent escalation, just like any other real estate. Furthermore, the investor profits from the price appreciation of these assets over time.
Due to this, fractional ownership platforms advertise rental rates of 8-9%, which are higher than traditional real estate yields of 2-6 percent. Furthermore, when property value appreciation is taken into account, these offers appear to aim for a pre-tax average annual return of 12-15% over a 5-year period.
3.High Yielding Fixed Income Investments: For the previous two years, FD returns have struggled to keep pace with inflation. But that is changing. We are seeing an increase in the number of start-ups that sell bonds, structured debt, and other high-yielding fixed income securities to retail investors.
They intend to make a dent in the 1.5 trillion-dollar foreign exchange market by issuing high-yielding debt securities. They not only offer greater interest rates, but they also allow investors to deposit as little as Rs 10,000.
4. Invoice Discounting: Typically, there is a time lag between a vendor giving goods or services and the price he receives at the end. Vendors engage a bank or a financial institution to effectively handle cash flows during this period. The bank then buys these receivables at a discount in exchange for cash up front.
Invoices can now be in the millions or even crores. These platforms divide an invoice into digestible chunks, allowing investors to purchase a portion of the unpaid invoice amount. However, in rare circumstances, transactions begin at Rs 50,000 or higher.
These chances typically have a short duration of 30 to 90 days (about 3 months), with a pre-tax average annual return of up to 15%. From a risk standpoint, it all boils down to the entity making the payment to the vendor’s reputation. And the investor has effectively purchased a portion of the invoice.
If the paying entity fails, delays payment, or has delivery or legal concerns, it might substantially impede your returns and possibly your principal’s receivability.
The platforms that provide this service make every effort to verify the veracity of the raised invoice and the entity’s payment history, seek post-dated cheques, and may even need a personal guarantee from the promoter.
How Should Investors Look at These Alternative Investments?
All of the alternative investments we discussed earlier are presented as higher-return options compared to FDs. Additionally, they can be viewed as diversification tools that have little correlation with traditional asset classes such as equities, bonds, and gold.
Certain seemingly straightforward products are being enhanced with additional layers of credit protection and security to enhance the risk-adjusted returns of these instruments. While this approach is effective in many aspects, it is important to be cognizant of the risks associated with these products.
Firstly, there is the ever-present credit risk, especially when dealing with lower-rated papers and when a solution requires the cooperation of multiple parties. Secondly, there is a concern regarding liquidity, as there is no active secondary market for selling alternative investments.
Finally, the lack of regulatory supervision can become a significant problem when things go wrong.
