When we talk of diversification of investments, the discussion centres around equity and debt. The reason is, the alternate investments are still alternate, i.e., not yet mainstream. The reason for these not being mainstream are multiple: Lack of awareness leading to lack of wide investor base, lack of secondary market liquidity, requirement of large ticket size, limitation of product availability, etc.
We will discuss here, apart from equity and debt, what are the potential options, the limitations for the retail investor, and whether there is any feasible way out.
Alternate investment avenues
Alternative Investment Funds (AIFs): There are various alternative investment funds set up under the Sebi AIF Regulations 2012. The investments could be variants of equity or debt not usually available to retail investors; it could be other investment avenues like real estate, etc. The limitation here is that the minimum investment ticket size is Rs 1 crore.
The AIF regulations have been designed, keeping in mind savvy investors. Since there is need for definition of savvy investors, it has been defined as Rs 1 crore of investment. If you have that much of investible corpus, there are options, particularly in category II AIFs. There are three categories of AIFs, category I is where they invest in infrastructure or social ventures, category II is for variants of equity and debt and III is meant for complex structures with leverage.
Commodities: Commodities may be metals, non-metals, agricultural items, etc. The way to participate is through the futures contracts available at MCX and other commodity exchanges. It does not require as big a ticket size as in AIFs. The limitation is that the investor needs to have awareness about price movement of the commodity, about the working of futures contracts at MCX / other exchanges and a trading account with a member of the exchange. If you have interest in a particular commodity and the bandwidth to learn the other relevant aspects, it is possible to figure it out.
Real estate: Investments happen mostly in physical form, i.e., in a second flat, etc., in physical form. Investment through financial instruments is possible. Earlier, there were venture funds investing in real estate, formulated under Sebi venture fund regulations. Now it is merged with the AIF regulations and any new venture has to be floated under Sebi AIF regulations, which means minimum `1 crore ticket size.
Sometimes, there are debentures (NCDs) issued by real estate companies, which carry an attractive rate of interest to compensate for the relatively higher level of risk. However, these debentures are issued through private placement, not through public issue. These are mostly floated through wealth managers catering to the HNI segment.
Gold: This is one alternate that is freely available to retail investors. There are various avenues for participation in gold: sovereign gold bonds (SGBs) which carry sovereign risk profile, i.e., best credit quality, you get the market price appreciation of gold and get a coupon, i.e., interest on top of it. However, it is not liquid and you have to hold it for minimum five years. It is like a five- to eight-year deposit. Then there are gold ETFs, i.e., exchange traded funds floated by mutual funds. In ETFs you get market linked returns net of annual management charges levied by the mutual fund but no coupon on top of it. ETFs are liquid. In ETFs, you are giving up the coupon of SGBs for the sake of liquidity.
While diversification beyond equity and debt is desirable, if you don’t have the bandwidth, no need to fret. As long as you are invested in discovered and liquid asset categories, there is reasonable diversification and you can grow your wealth over a period of time. If you have the bandwidth, you can diversify into alternates but as the name suggests, it is alternate, i.e., it should be a minor component of your portfolio.