by admin | August 1, 2024
Last updated on August, 1 2024,
The finance world has changed, bringing new investment opportunities. Besides stocks and bonds, there are alternative investments. These do not fit the usual investment types.
Alternative investments include private equity, hedge funds, real estate, art, cryptocurrency, and NFTs (non-fungible tokens). They help diversify your portfolio and aim for long-term financial goals. These investments have fewer regulations and are not easily turned into cash.
Table of Contents
Different Types Of Alternative Investments:
Private Equity:
It refers to capital investment made into private companies or ones which are not listed on the public exchange. These include venture capital, growth capital or even buyouts.
Hedge Funds:
These are relatively liquid assets and use various investing strategies with the goal to achieve a higher return on investment. Hedge funds are exclusive and available to institutional investors, including mutual funds, pension funds, endowments, and high-net-worth individuals.
Real estate:
It is an interesting category as it generally has a lower correlation to the broader stock market. This means that values in real estate do not fluctuate as often as in the stock market. Though it is an old form of investment, it offers a higher return without greater risk.
Arts:
Unlike the assets of the traditional finance market, art is a tangible asset that also offers potential appreciating value over time. The benefit is the potential for high returns.
NFT:
These are digital assets that use cryptography. They are like artistic and digital collectibles connected to artwork, collectibles, and unique virtual items. NFTs are very popular in the investment world right now. They have special benefits compared to traditional financial assets. For example, NFTs can be scarce or limited edition, which makes them very valuable.
Cryptocurrency:
Cryptocurrency is seen as a risky but valuable alternative investment. It uses blockchain technology and can give high returns. The rules around crypto are not strict, so it is mostly free from government control. You can invest in cryptocurrency through exchanges or buy shares in Bitcoin-based technology companies that might grow a lot in the future.
The Evolution Of Alternative Investments:
Trading in stocks, bonds, or commodities is a long-standing practice. In India, trading started in the 18th century. In the US, it began in 1792. People who wanted to get rich began investing money in stocks and commodities through stock exchanges. By the 20th century, technology made it easier to access the stock market. This led to more investments and many individuals became experienced investors.
Fast-track to the digital era, the trading industry is evolving every day. With rapid changes in the functionality and operation of the trading industry, we also witness a shift in the audience segment.
Yes, the trading industry is no longer limited to seasonal investors. While the old generation, even as beginners, are trying their luck for fortune, Millennials (Born between 1981 and 1996) and Gen Z (born between 1997 to 2012), are confidently embracing the trading world through alternative investments. According to Fast Company, 30% of GenZ and 25% of Millennials invest in alternative investments or know the platforms that cater to them.
Alternative investments are a pool of financial assets that do not fall under the conventional gamut of trading categories, like stocks or bonds. These include real estate, fine art, cryptocurrency, peer-to-peer lending, private equity, and collectables.
While these investment types can differ in structure and accessibility, a few similar characteristics include:
- They are not regulated like traditional assets.
- They cannot be easily liquated, meaning sold or converted into cash.
- Lower correlation when compared to traditional investment options.
According to a survey by the Motley Fool in October 2022, 60% of GenZ and Millennial investors own cryptocurrency as stock and 40% of them hold meme stocks.
But why are the GenZ and millennials adapting to the new-age alternative investments? Let’s understand a few reasons here:
Lower Interdependency:
The trading market has been volatile for a long time. Experienced investors know the risks and diversify their portfolios. Gen Z and Millennials benefit from assets other than stocks and bonds. These alternative investments are not connected to each other. So, if one asset goes down, it doesn’t affect the others.
Traditional investments are different. They are more affected by market changes because they are connected. This makes them very sensitive to ups and downs. Alternative investments help new investors to spread their risk and lower it.
Stay Passive:
Market volatility means seasoned investors need to stay alert and follow market trends. They are always checking the market to understand potential profits and losses. However, alternative investments offer tools that let Gen Z and Millennials invest without constant management. Some investment options today are completely passive. New investors can get help from experienced investors and grow their portfolios.
Wider Options:
The stock market is not just for traditional investments anymore. GenZ and Millennials now have many new ways to invest. They can put money into things like crypto, NFTs, tech, and real estate. Easy-to-use apps make it simple for them to invest in different kinds of assets. Even people with average salaries can invest in these new options. Whether they want to put in a few hundred or a lot more, there are many choices for them to explore.
Experimentative:
The rise in disposable income in India allows people to take more risks than before. In the past, investing meant choosing “safe investments.” Now, GenZ and Millennials like to try new investment options that promise higher returns. There is also a lot of information available about investing and finance. This helps these tech-savvy individuals learn and make informed investment choices, even if they involve some risk.
Secondary Income:
The way people work has changed because of the Gig economy. Younger folks, like Gen Z and Millennials, are trying out freelancing and taking on different projects instead of sticking to a typical 9-5 office job. This lets them make more money and use the extra cash for other investments without having to wait for a long time. So, they’re smart about using their digital skills to make extra money consistently. For example, they might invest in things like P2P lending, which can give them a steady income of about 8-10% every year. But sometimes, they might need to sell certain investments at a higher price to get enough cash flow.
A Pool Of Benefits:
Further, alternative investments are gaining increased popularity, and also offer advantages for GenZ and Millennials:
- Some alternative investments offer tax benefits, which are not typically available in traditional investments.
- It has the potential to offer a higher rate of return than that of traditional investments.
- Diversification with a portfolio beyond traditional assets provides overall lower risk.
- Many alternative investments provide a hedge against inflation.
- Provides access to unique assets, also providing socially responsible investment opportunities.
Thus, GenZ and Millennials are risk-takers. They look to challenge the regular trading phenomena and seek new opportunities to invest. As such, they are exploring alternative investments to gain a diverse and higher return on investments. However, no investment is risk-free. A careful evaluation of the pros and cons can help make informed decisions.