As the name suggests, alternative investments do not belong to conventional investment categories such as stocks or bonds but rather represent a diverse range of financial assets as private equity, private credit, hedge funds, real estate, venture capital, commodities and collectibles. 

These have grown in popularity in recent years, especially as investors seek to diversify their portfolios by allocating a portion of a portfolio to alternative investments and enhance the long-term investment approach.Not only do alternative investments have the potential to diversify a portfolio of traditional assets but often deliver performance that is not correlated to traditional markets, helping investors navigate volatility.

According to the recent industry reports, the alternative assets market in India currently estimated at $400 billion AUM is projected to grow 5x to $2 trillion over the next decade. 

Globally the alternative investments have reached an estimated $25 trillion AUM and continues to expand as the investors base and their allocations to private markets increase. Even though India today stands as the world’s fourth-largest economy, alternative investments remain underpenetrated at just 4% of GDP, compared to over 10% of GDP in mature markets like the US and Europe with investors allocating as high as 20% of their portfolio to alternatives.

This gap presents as a significant growth opportunity in India, especially as family offices, high-net-worth individuals (HNIs) and ultra-HNIs increasingly seek non-traditional, higher-yield assets.

Indian investors are participating in alternative investments through allocation to AIFs (Alternative Investment Funds), REITs (Real Estate Investment Trusts), InvITs (Infrastructure Investment Trusts), offshore opportunities through GIFT City-based funds and international platforms. 

Each asset category has unique characteristics in terms of expected return, risk, yield, liquidity, and capital requirements that require a closer look to better understand the different benefits that it can bring to a portfolio. While some of the asset categories may serve more of a growth and capital appreciation purpose, others may protect portfolios against inflation and/or provide stable income. Some strategies may offer a combination.

Historically, alternative investments have offered return premiums to investors willing to accept greater illiquidity and have been shown to meaningfully outperform public markets over time. While access to AIFs has been driven by a mix of macroeconomic, regulatory, and technological forces, yet alternative investments can present their own challenges, requiring an in-depth understanding of the space to evaluate and choose the alternatives suitable to risk profile of the investor. Our team harnesses its global knowledge and experience to carefully curate a set of high-conviction investment strategies in the alternatives space, designed to help investors in appropriate capital allocation. 

Investors who are beginning their journey in alternatives space can start with shorter tenure (average life of 5 to 7 years) private equity funds which invest in stable businesses with predictable exit scenarios and private credit funds which generates cash yield. This allocation can be enhanced to long tenure equity funds of 8 to 10 years, investing in stellar fund managers with a track record in the fund’s investment strategy. There are many nuances in the selection of the fund manager including but not limited to characteristics like having skin in the game, ability to leverage their experience to back transformational companies poised for growth, navigate the market dynamics supporting the portfolio companies and generate the alpha over the investment horizon.

Despite the steady growth in alternatives, one of the setbacks in the past few years has been slowdown in liquidity avenues for AIF investors on account of delayed exit options of the underlying portfolio entities of these AIFs. This is expected to improve in the following years as many of these entities will use vibrant capital markets and possible secondaries with wider participation and offer opportunities for investor exits.

Investors who thoughtfully allocate to alternatives – balancing risk, liquidity, and long-term vision, could benefit significantly in the next decade.

The author, Rajini Viswanath, is the CIO of Alternatives at LGT Wealth India.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making investment decisions.