As a stock tank, look to alternative investments for better returns

By Subhashish Bhadra

After hitting record highs in October last year, Indian stock markets have fallen more than 15%. Rising inflation and interest rates have eroded investors’ wealth, with Thursday alone recording cumulative losses of Rs. 5.3 lakh crore on the stock exchanges. Nearly 10% of the wealth of an average Indian household is in mutual funds, and that capital will now seek greener pastures. Some pundits have started warning that cash is the only place to hide in a bear market. But are they right?

Not enough. According to SEBI, investments in alternative investments hit the ₹2 lakh crore mark in January-March 2021, growing by more than 30% on the year despite the effect of the pandemic. This category of investments includes newer assets such as bill discounting, angel investing, infrastructure funds, social venture capital funds, revenue-based financing, etc.

Hitherto the preserve of wealthier Indians, alternative investments are now becoming accessible to ordinary Indians thanks to new-age fintech platforms. These start-ups are using India’s growing digital infrastructure and growing investor awareness to showcase a diversity of new investment options, within the risk frameworks put in place by regulators.

How is it different from traditional investments?
The underlying dynamics of alternative instruments often differ significantly from those of traditional assets. For example, while inflation might weigh on stock markets, some alternative investors might actually benefit from higher inflation. Therefore, alternative assets allow investors to have greater diversification, lower volatility and reduced risk.

To illustrate this point, let’s look at three examples of alternative investment assets. While each offers lucrative returns and varying risk profiles, investors should realize that investments are subject to different types of market risk, and they should spend time understanding them better.

* Merchandise
What is that?

Commodity trading is just like stock trading, i.e. buying when the price is low and selling when the price is higher. For example, NSE MCX (Multi Commodity Exchange) lists over 20 commodities, with oil, gold and metals being the most popular. Some national and international exchanges facilitate the trading of new products such as marijuana, agricultural products, dried fruits, etc.

How long?
Investors recommend terms longer than one year, due to market fluctuations. In the longer term, the prices of most commodities tend to increase significantly.

How risky is it?
Market fluctuations in the commodities traded frequently impact commodity futures prices, making it a fairly risky investment.

What types of feedback are expected?
Based on data published by NSE, commodity investments of more than Rs 5 lakhs yield an average IRR of 25-45%.

Subhashish Bhadra, Director of Capital Platform at Klub

* Discount on invoice
What is that?

Invoice discounting is a simple alternative investment in which investors provide upfront cash to companies, while recovering their investments when invoices issued by companies to their suppliers come due. An invoice is usually traded at a discount, so the investor makes a profit when it is fully repaid by the seller.

How long?
Since vendors typically pay their invoices within 45-90 days, invoice discounting is suitable for investors looking for short-term investment products.

How risky is it?
Invoice discounting is considered a safe investment option to protect portfolios against market volatility while reaping high returns. This is especially true when the invoice is issued against reputable marketplaces or vendors.

What types of feedback are expected?
Investment products from private players in this space yield an average IRR of 12-20% for short-term commitments.

* Funding based on income
What is that?

Revenue-Based Financing (RBF) is a new asset class in which investors provide initial capital to a company, in exchange for a share of its future revenue. Since a company’s earnings are based on “real” economic factors and are detached from market “sentiment”, RBF offers a great opportunity for diversification to investors. Retail investors can enroll in multiple industry-validated RBF products and choose from a variety of companies to invest in, with payouts tied to company earnings.

How long?
Terms are flexible depending on the needs and risk profile of the business, while generally ranging from 12 to 24 months.

How risky is it?
Every company has a different risk profile, and new-era fintech startups provide sophisticated risk analysis to guide investors. Investors can track the company’s financials and industry performance to better understand risk.

What types of feedback are expected?
RBF platforms have generated IRRs ranging from 18 to 28% for their investors.

In an increasingly uncertain world, wouldn’t it be a good idea to shake things up by further diversifying your investment portfolio and trying out alternative investments?

(The author is the Director of Capital Platform at Klub, a FinTech startup that provides India’s first community-backed investment product for revenue-based financing in D2C digital startups. Opinions expressed are personal and not necessarily those of Financial Express Online)