The evolution in the finance world has provided new opportunities for investments. While traders can still invest in stocks and bonds, alternative investments are financial assets which do not fall under the bracket of conventional investment categories.
Alternative investment includes private equity, hedge funds, real estate, arts, cryptocurrency, and NFTs (non-fungible tokens). These provide an exciting opportunity to diversify your portfolio and achieve long-term financial goals. Governed by fewer regulations, alternative investments are fairly illiquid.
Different Types Of Alternative Investments:
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.
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.
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.
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.
These are digital, cryptographic assets, basically artistic and digital collectables associated with artwork, collectibles, and exclusive virtual assets. NFTs are currently hotcakes in the investment world. They offer distinctive advantages over traditional financial assets like the scarcity or limited edition of NFTs making them highly valuable.
Though it is considered risky, cryptocurrency is regarded as a valuable form of alternative investment. Building on blockchain technology, they offer higher return value. Regulations around crypto are still not stringent, therefore, enabling immunity from government intervention. One can invest in cryptocurrency through exchanges or buy shares in Bitcoin-based technology companies that can offer high growth in the future.
The Evolution Of Alternative Investments:
Trading in stocks, bonds, or commodities is an old-age common practice. The history of trading in India dates back to the 18th century. In the US, trading began as early as 1792. Individuals aiming to become wealthy started investing cash in stocks and commodities through stock exchanges. Cut to the 20th century, technological advancements have enabled easy access to the stock market, raising the bar of investments, and individuals becoming seasoned 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:
The trading market has for long depicted volatility. As seasoned investors are aware of the risk and choose to diversify their portfolios, GenZ and Millennials benefit from non-correlated assets, other than stocks and bonds. Since alternative investment options are not dependent on each other, market fluctuations in the case of one asset, do not impact others. In the case of traditional investments, the correlation between different assets or classes is affected by market ups and downs, making them highly sensitive. Therefore, alternative investments enable new-age investors to diversify as well as reduce the risk of their portfolios.
Market volatility has required seasoned investors to stay alert and up to date on market trends. They are constantly active in determining the market status to understand the potential for profit and loss. However, alternative investments with a variety of tools provide GenZ and Millennials with the freedom to invest freely without actively managing their portfolio. Also, with some investment options available today as absolute passive, new-age investors can seek support from seasoned investors and grow their portfolios.
The stock market is no longer limited to traditional investments. The growing surge in alternative investments also provides GenZ and Millennials valuable options to invest in a wide array of options. From crypto to NFTs, to tech and real estate companies, the digital era with easy-to-use applications enables them to invest in distinctive assets, conveniently. Additionally, alternative investments attract investments even from an average paid salary employee. Whether it is about investing a few hundred to lakhs in startups or growing products, GenZ and Millennials have multiple options.
The increase in disposable income in India provides opportunities for individuals to take higher risks than ever before. While earlier the concept of investment was related to ‘safe investments’, GenZ and Millennials are open to experimentation and exploring new segments of investment, promising higher returns. Also, the availability of large-sized content about investment, finance, and returns helps create awareness among these digital natives who carefully invest, but also take risks.
The Gig economy has changed regular 9-5 office work dynamics. GenZ and Millennials explore freelancing and multiple projects to earn, other than a standard monthly salary. It allows them to earn more and keep the extra cash invested in alternative investments without a lock-in period. Thus, the digitally savvy generation leverages the income and generates extra and steady cash flow. Like, investment in P2P lending offers a predictable income of nearly 8-10% annually. Yet, some alternative investments may require to be sold at a premium to generate adequate 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.