Decoding India’s investment landscape – Why alternate investment opportunities need to be prioritized

Alternative investment as an asset class has emerged as the fastest growing investment segment in India — faster than even mutual funds or the portfolio management services sector. If we look at the average for the last five years, they have shown a growth rate of over 70% whereas the mutual funds/PMS segment has grown at only 14%-16%.

With such fantastic growth postings, the Indian AIF industry is at the cusp of a breakout growth. Let’s first take a look at a few factors that are driving this growth in the recent years.

Need for portfolio diversification – As per conventional wisdom, saving for a rainy day was considered as investment. Buying gold jewellery that remained locked up, investing in low-yield retirement plans, and long-term tools such as life insurance were the popular options. Those who aspired of creating wealth, invested in stocks.

While all these continue to remain valid, the continuously dipping ROI on bank deposits, insurance schemes etc., are a cause for concern. Stock market is subject to so much volatility that one can never be sure of getting a good return, and mutual funds are also linked to the stock market. This is where the AIF segment has emerged as a high return opportunity that is ideal for parking some part of the portfolio. The higher returns generated by alternative investments can make up for the sluggish ROI on stocks and mutual funds in the current context, and keep an investor on track for the wealth generation goals.

Greater risk appetite – With rise in disposable incomes, the average Indian investor’s appetite for risk has gone up. While earlier, people would be keen to invest only in safe and conservative yield options, now there is an acceptance of the need to take calculated risks in investments as well. Putting 5% to 10% of the portfolio into alternate products is now considered safe.

Building a hedge against inflation – With the rate of inflation making cost of living surge tremendously, it is being felt that long-term fixed deposits or mutual funds etc., might cut it to overcome the inflation challenge. In the current context, the inflation is likely to offset capital gains on traditional investments in the long run. That’s a risk which can be mitigated by alternative investments!

Lowering of entry barriers – Alternative investments typically had a ticket size of one crore plus which made the option exclusive to HNI and UHNIs only. However, now there are reliable new age tech-driven platforms which have brought the barrier down to a level wherein the average salaried people can aim to invest part of their portfolio into this asset class.

India is currently on a massive growth spree. From infrastructure to transportation networks, digital technology to startups, rapid growth is being seen in every area. To sustain this, there will be a need for capital infusion in the years ahead. Through alternative investment channels such as asset-based leasing, startups as well as established enterprises, service operators such as transportation and logistics fleet companies, airlines, real estate projects and manufacturing facilities etc., can be financed with greater ease. When people invest in startup related opportunities, they enable the company to get easier funding support and reduce the need for them to burn the cash in hand. As business grows, so does the ROI and it can be a win-win situation for all.

A major boost to alternate investments should come from institutional capital. The next big leap of industry growth can come through institutions and fund management companies that manage pension and retirement funds, sovereign funds, insurance funds and so on.

SEBI reported that AIFs grew 38% year-on-year to reach Rupees 6.09 lakh crore as of December 2021 compared to the 4.42 lakh crore a year ago. In the same period, the entire mutual fund industry saw a growth of only 22%. The time has come when policy, industry and mass level boost to alternative investments have become the key to future prosperity for all!

(The author is Mr. Ankit Kedia, Founder & Lead Investor, Capital A and the views expressed in this article are his own)