public markets becoming more volatile, inflation remaining persistent, and traditional savings instruments delivering lower yields, alternative investments are gaining more attention. These assets have long been used by institutions, endowment funds, and high-net-worth investors to diversify portfolios and pursue higher long-term returns.
In this blog, weтАЩll break down what alternative investments are, why they matter, their advantages and risks, and when they may be suitable for your portfolio.
Key Takeaways
- Alternative investments are assets outside stocks, bonds, and cash.
- They can offer diversification and potentially higher long-term returns.
- They come with meaningful risksтАФilliquidity, complexity, and higher costs.
- They are suited mainly for investors with long horizons and higher risk tolerance.
- Due diligence and a clear strategy are essential before investing.
What are Alternative Investments?
Alternative investments refer to asset classes outside traditional investments such as stocks, bonds, and cash. They are designed to generate returns from sources that behave differently from public markets, making them attractive for diversification. Unlike conventional assets, alternative investments often operate in private markets, involve specialised strategies, and rely on different return drivers like private business growth, asset scarcity, or commodity cycles.
How They Differ from Traditional Investments
Unlike stocks and bonds that trade on public exchanges:
- Alternative investments are usually less liquid
- Valuations are less transparent
- Returns are less correlated with market indices
- Holding periods tend to be longer
Key Characteristics of Alternative Investments
- Illiquid in nature
- Limited regulatory oversight
- Longer investment horizon
- Higher minimum investment requirements
- Lower market correlation
- Complex risk profiles
Types of Alternative Investments
Below is a breakdown of the most commonly recognised categories:
- Real Estate: Includes physical property, commercial assets, rental property, REITs, and real estate crowdfunding platforms. Offers rental income + capital appreciation.
- Commodities: Assets like gold, silver, oil, natural gas, and agricultural contracts. Used for inflation hedging and diversification.
- Private Equity / Venture Capital: Private equity investments involve buying stakes in non-public companies. Venture capital focuses on high-growth startups.
- Hedge Funds: Actively managed investment pools using strategies like arbitrage, derivatives, leverage, and short selling. Typically aimed at high-net-worth investors.
- Collectibles & Tangible Assets: Fine art, classic cars, watches, rare coins, luxury wine collections. Value increases through rarity and demand.
- Cryptocurrencies & Digital Assets: Includes Bitcoin, Ethereum, DeFi tokens, NFTs and blockchain-based assets. Highly volatile but fast-growing category.
- Peer-to-Peer Lending / Private Debt: Direct lending platforms, private credit, invoice financing. Lenders earn interest from borrowers instead of banks.
Why Investors Use Alternative Investments
Investors allocate to alternative investments for reasons that go beyond traditional return goals. These assets behave differently from stocks and bonds and can strengthen overall portfolio construction when used strategically.
Some core reasons why investors consider alternatives are:
- Diversification: Alternatives typically have lower correlation with traditional markets, helping reduce portfolio volatility.
- Potential for Higher Returns: Access to private markets, early-stage companies, specialised strategies, and non-public opportunities.
- Inflation Hedge: Hard assets such as real estate, infrastructure, and commodities tend to retain or increase in value during inflation cycles.
- Illiquidity Premium: Investors are often rewarded with higher long-term returns for keeping capital locked for longer periods.
- Access to Niche or Emerging Themes: Alternatives offer access to sectors such as sustainability, AI, infrastructure, renewable energy, startups, and Web3.
Advantages & Disadvantages of Alternative Investments┬а
Alternative investments offer attractive potential benefits, but they also come with structural challenges that investors must recognise before allocating capital.
| Advantages | Disadvantages |
| Diversifies portfolio | Illiquidity & lock-up periods |
| Higher return potential | High costs & fees |
| Inflation hedge in certain assets | Hard to value accurately |
| Access to private deals & emerging themes | Limited transparency & regulation |
| Less correlated to public markets | Requires specialised knowledge |
| Can generate income + growth | Higher minimum investment barriers |
How to Invest in Alternative Investments
Investors approach alternative assets differently than traditional markets. Access, liquidity, and minimum investment vary widely depending on the type of alternative investment and investor profile.
Direct vs Indirect Investing
Direct investing involves owning the underlying asset (e.g., direct private equity, owning a commercial property). On the other hand, indirect investing happens via through a pooled structure (e.g., funds, ETFs, AIFs, platforms).
Options for Retail Investors
Retail investors can access alternatives through regulated routes such as:
- Liquid alternative funds
- Alternative ETFs
- Registered / open-ended alternative products
- Crowdfunding platforms (region-dependent)
Options for High-Net-Worth & Institutional Investors
Larger investors typically access private markets directly through:
- Private equity and VC funds
- Hedge funds
- Real estate funds
- Category I / II / III AIFs in India
When Should You Consider Alternative Investments?
Alternative investments make sense only when they serve a specific purpose in your portfolio, not as a first step or impulse allocation. They are usually introduced once your financial base is strong and youтАЩre looking for additional diversification or return sources outside traditional markets.
Strong Foundation in Place
You should consider alternatives only after core needs are securedтАФemergency funds, insurance, and a stable equity-debt portfolio. Without this base, alternatives can add unnecessary strain due to lock-ins and risk.
Long-Term Investment Horizon
Alternatives are suitable when you can commit capital for several years without needing liquidity. Most private market assets take time to mature and unlock value.
Need for Diversification Beyond Stocks & Bonds
They make sense when you want returns driven by different factors than public markets. Alternatives provide exposure to assets that behave differently across cycles.
Seeking Higher Long-Term Return Potential
For investors who want access to private markets, early-stage businesses, or specialised strategies, alternatives provide upside potential not found in traditional public markets.
Comfort With Higher Complexity
Alternatives are appropriate when you understand higher risk, higher fees, and more specialised strategiesтАФand are comfortable analysing them or working with advisors.
Conclusion
Alternative investments can play a valuable role in a portfolio, but only when approached with clarity and understanding. They offer diversification, access to private markets, and the potential for higher long-term returnsтАФbut these benefits come with trade-offs such as limited liquidity, higher fees, and greater complexity.
If youтАЩre considering alternative investments, itтАЩs wise to evaluate the pros and cons carefully, understand the risks involved, and assess whether they genuinely align with your goals. Speaking with a qualified financial advisor or wealth manager can help determine whether alternatives fit your financial plan responsibly.
FAQs on Alternative Investment
What is an example of an alternative investment?
Private equity, hedge funds, real estate, venture capital, commodities, gold, cryptocurrencies, and art are common examples of alternative investments.
What is the most popular alternative investment?
Real estate remains the most widely used alternative investment globally, followed by gold and private equity.
Are alternative investments risky?
Yes, many alternative investments carry higher risk due to low liquidity, limited regulation, long lock-ins, and higher volatility compared to traditional investments.
Is gold an alternative investment?
Yes. Gold is considered a traditional alternative investment and is often used for diversification and inflation protection.
What are the key characteristics of alternative investments?
They are typically less liquid, less regulated, have higher minimum investment requirements, and often require longer holding periods.
How can alternative investments be useful to investors?
They help diversify portfolios, reduce reliance on equity markets, and provide access to private or non-market assets.
What are the regulatory standards for alternative investments?
Regulation varies by jurisdiction. In India, AIFs operate under SEBI regulations; globally, standards differ across regions.
What are the typical minimum investment amounts for alts?
Private equity, hedge funds, and AIFs often require higher minimumsтАФcommonly starting from тВ╣1 crore in India.
How are alternative investments taxed?
Taxation depends on the categoryтАФprofits may be taxed as capital gains, business income, or distributed income depending on structure and holding period.
What are the tax implications of AIFs (Alternative Investment Funds) in India?
Category I and II AIFs are generally tax pass-through structures; Category III AIFs are taxed at the fund level, often at the highest applicable rate.
What is the most popular alternative investment?
Globally, real estate continues to attract the highest allocation within the alternative investment category.
Disclaimer
The information provided in this article is for educational and informational purposes only. It should not be considered as financial or investment advice. Investing in stocks involves risk, and it is important to conduct your research and consult with a qualified financial advisor before making any investment decisions. The author and publisher are not responsible for any financial losses or gains that may result from the use of this information.
