India is currently striving to become one of the largest economies in the world, and this ambitious goal is having a significant impact on the investment landscape of the country. With an increasing number of high-net-worth individuals (HNIs) seeking to diversify their portfolios and generate higher returns, India’s wealth management ecosystem has undergone a remarkable transformation in recent years. The emergence of alternative asset classes has played a crucial role in this transformation, offering investors new opportunities to invest their money and achieve their financial goals.
As India’s economy continues to grow and evolve, alternative asset classes are likely to become an even more important part of the investment ecosystem, helping HNIs to create wealth and achieve their long-term financial objectives.
Let’s find out how!
Alternative Asset Classes: A Booming Investment Option
Alternative Asset Classes or Alternative Investment Funds (AIFs) refer to investments in assets that are not part of traditional asset classes such as equities, bonds, and cash. These include private equity, hedge funds, real estate, commodities, and infrastructure.
According to a recent report by PwC, alternative assets under management in India are expected to grow at a CAGR of 19% to reach $1.1 trillion by 2025.
This rise in alternative assets can be attributed to several factors. One of the primary reasons is the search for higher returns. With traditional asset classes yielding lower-moderate returns in comparison, investors are looking for alternatives that offer better returns.
Now, Alternative Funds provide diversification benefits and have the potential to generate higher returns than traditional asset classes. For instance, private equity investments have delivered returns of 20-25% in India over the last few years, while the Nifty 50 Index has delivered returns of around 12%.
Moreover, alternative assets provide an opportunity to invest in uncorrelated assets. In times of market turbulence, alternative assets have proved to be resilient, and they have exhibited lower volatility than traditional asset classes. Additionally, alternative assets have a longer investment horizon, and they are illiquid. This characteristic allows investors to invest for the long-term, providing stability to the portfolio, and attributing to its popularity among high-end investors.
Alternative Asset Classes and High-Net-Worth Individuals (HNIs)
Alternative Asset Classes/ AIFs have emerged as a game-changer for HNIs, providing them with a range of investment options including private equity, hedge funds, real estate, commodities, art, and more beyond traditional asset classes like stocks and bonds.
HNIs are increasingly recognizing the potential of alternative investments to help them diversify their portfolio, mitigate risks and generate higher returns.
As a matter of fact, high-net-worth individuals in India have a significant allocation to alternative assets, with an average of 26% of their wealth invested in such assets.
But why AIFs?
Well, these Alternative Investments tend to have a low correlation with traditional asset classes, which means that they are less affected by market fluctuations. This makes them an ideal option for diversifying investment portfolios and reducing overall risk.
In addition to diversification and higher returns, alternative asset classes also offer investors the opportunity to invest in emerging markets and industries.
For example, private equity and venture capital firms invest in start-up companies that are often at the forefront of emerging industries such as technology and biotech.
One of the popular alternative asset classes among HNIs is private equity.
Private equity investments offer the opportunity to invest in companies that are not listed on the stock exchange, providing access to high-growth potential businesses. Additionally, private equity investments are often accompanied by management control, providing a say in the functioning of the company.
Another alternative asset class that has gained popularity among HNIs is real estate. Real estate investments have provided attractive returns in the past, and they are believed to offer a hedge against inflation. Real estate investments can also provide rental income, making them an attractive investment option.
Impact of this Evolving Investment Ecosystem
This evolving investment ecosystem in India has several implications for investors.
Firstly, it provides investors with a wider range of investment options, catering to different investment needs.
Secondly, it offers an opportunity to generate higher returns than traditional asset classes.
Thirdly, it provides diversification benefits, reducing concentration risk.
Moreover, the growth of alternative asset classes is changing the wealth management industry. With an increasing demand for alternative assets, wealth management firms are expanding their offerings to include alternative asset classes. This trend has led to the emergence of specialized wealth management firms that cater exclusively to AIFs.
The growth of these asset classes has also spurred innovation in the financial industry. With the rise of fintech companies, investors can now have conceivable access to such alternative assets through various platforms. These platforms now provide information and access to AIFs to each type of investor that was previously available only to HNIs.
Having said that, it is important to note that AIFs come with unique risks and challenges. Therefore, investors need to work with experienced and qualified financial experts to navigate this complex investment landscape successfully.
Rurash Financials can help you gather valuable insights on different categories of Alternative Investment Funds, at the same time, help you build a diversified portfolio that meets your investment objectives and risk tolerance.