What Is Alternative Investment? Meaning, Types & Benefits

An alternative investment is any type of investment that does not fall into the usual categories, like stocks, bonds, or cash. These are often used to spread risk and explore new ways of earning returns.

For example, imagine you have ₹10,00,000 to invest. You put ₹4,00,000 in stocks and ₹3,00,000 in fixed deposits. With the remaining ₹3,00,000, you decide to buy a piece of art or invest in a small business through a private fund. These are alternative investments because they do not behave like regular shares or savings.

They can include things like real estate, gold, hedge funds, antiques, or even farm land. Some may carry a higher risk, but they also offer a chance for higher rewards.

Example Investment Split

By allocating a portion of your portfolio to alternative investments, you can reduce dependence on conventional assets, spread risk, and potentially enhance long-term financial growth.

In this blog, we will explore alternative investments, explaining how they differ from traditional options and how they can help diversify your portfolio and potentially increase returns.

Understanding How Alternative Investments Work

Alternative investments are quite different from traditional options like shares, bonds, or savings accounts. They are often used by very wealthy people or big organisations because they can be more complex and risky.

Why Are They Not for Everyone?

Most alternative investments are:

• Hard to understand unless you study them well
   
• Not strongly regulated like regular investments
   
• High in entry cost, and may ask for ₹10,00,000 or more up front
   
• Expensive to manage, with fees higher than mutual funds or ETFs

While some charge higher starting fees, the costs of selling are often lower because there is less daily buying and selling.

Harder to Sell Than Regular Shares

Selling alternative assets is not always easy. They are often illiquid, which means it takes longer to find a buyer.

For example:
 

These things are special and not traded often. That makes it hard to find the right price and a buyer at the same time.

Alternative investments can be exciting and valuable, but they are not simple. They need more money, more knowledge, and more time to manage. If you are planning to invest in them, always learn well and think carefully before making a decision.

Types of Alternative Investments

Alternative investments go beyond regular shares or bonds. Many of them are tied to real-world items or special financial products. Here are some common types that investors often explore.

Real Estate

Real estate involves buying property or putting money into real estate-based products. These may include:

• Residential or commercial buildings
   
• Real Estate Investment Trusts (REITs)
   
• Real estate mutual funds
   
• Property crowdfunding platforms
   

Example:
Ravi buys a small flat and rents it out. He earns a monthly income and hopes the value of the flat increases over time.

Commodities

Commodities are physical items like gold, oil, or wheat. They are always in demand because people use them daily.

Example:
Gold is used in jewellery and electronics. Its price is steady and many people buy it during uncertain times.

Commodities are basic goods that are widely used in daily life and traded in markets, often serving as both essential resources and investment options.
 

Understanding the practical uses of commodities helps investors and consumers appreciate their value, stability, and importance in both everyday life and financial markets.

Farmland

Farmland combines real estate and commodities. Owners benefit from the value of land and also earn from growing and selling crops.

Example:
Priya invests in farmland. The land increases in value, and she earns from the harvest her farmer sells each season.

Art and Collectibles

These are items that people may buy for enjoyment or historical interest. They may include:

• Paintings and sculptures
   
• Sports or film memorabilia
   
• Vintage watches or rare coins

Example:
A collector buys a cricket bat signed by a famous player. Years later, it becomes valuable due to the player’s fame.

Cryptocurrencies

Cryptocurrencies are digital coins like Bitcoin or Ethereum. They are not managed by governments and are bought or sold on special platforms.

Example:
Arjun buys some cryptocurrency through an app. The value changes quickly, but he hopes it will rise in the future.

Venture Capital and Private Equity

This involves investing in private companies or start-ups before they become public. It may bring high returns, but it also carries high risk.

Example:
Meera invests ₹5 lakh in a small tech start-up. If the company grows, her share may become very valuable.

Peer-to-Peer Lending

Peer-to-peer (P2P) lending allows you to lend money to others through online platforms. You earn interest when they repay you.

Example:
Raj lends ₹50,000 to a small bakery through a lending site. The bakery repays him in small amounts with added interest.

How Alternative Investments Help Diversify Your Portfolio?

One of the biggest reasons people choose alternative investments is to make their portfolios stronger and more balanced. This is called diversification. It means you do not put all your money in one place. Instead, you spread it across different types of assets so that your overall risk goes down.

Why Is Diversification Important?

When you invest only in shares or bonds, you rely on how the stock market performs. If the market drops, your money may lose value quickly. But if you also own real estate, gold, or a piece of art, those things may keep their value even when shares fall.

Let’s say you have ₹10,00,000 to invest. You split it like this:
 

If shares go down, your gold or property might stay stable or even grow. This mix helps protect your total money.

Example:-

Ritu invested mostly in company shares. In a bad market year, her investments lost value. Her friend Aman had shares, some gold, and farmland. His gold went up in value, which balanced the losses in his shares. He did not panic because his portfolio was better spread.

Key Benefits of Diversification with Alternative Investments
 

• Lower risk if the stock market performs badly
   
• Better balance across different asset types
   
• More chances for returns in different market conditions
   
• Access to long-term value from items like land or collectibles
   

Alternative investments give you more ways to grow and protect your money. By adding them to your portfolio, you reduce your chances of losing everything if one part of the market fails. A well-diversified portfolio is like a strong team where every player adds value in their own way.

Conclusion

Alternative investments offer new ways to grow your money beyond shares, bonds, or savings. They include real estate, gold, digital coins, art, and more. These options can help you spread your risk, but they often need more money, more care, and a long-term view to work well.

FAQ’s

Can alternative investments hedge against inflation?
Yes, assets like gold, real estate, or commodities often retain value when traditional markets face inflationary pressure.
 

Do alternative investments have tax benefits?
Some do, depending on the asset type and jurisdiction, such as long-term capital gains advantages for certain real estate or fund investments.
 

How liquid are alternative investments?
Many are less liquid than stocks or bonds, meaning they may take longer to sell or convert into cash.
 

Are alternative investments suitable for short-term goals?
Generally not, as they are better for long-term wealth creation due to market fluctuations and longer holding periods.
 

Can technology make alternative investments more accessible?
Yes, platforms for fractional ownership, crowdfunding, or digital commodities have opened alternative investments to smaller investors.

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