Diversify Portfolio Beyond Stocks, FDs And Gold With Alternative Investments
The only thing constant in the financial world is change. Therefore, your need to keep up with this evolving world is paramount. Gone are the days when traditional investment options like stocks, fixed deposits, and gold were enough to fulfil your financial goals.
With markets becoming increasingly dynamic and unpredictable, it is crucial to adapt to alternative investments to bring diversification and maximise your returns on investments. Alternative investments are gaining popularity among investors. But what is the reason behind this popularity? Read the article below to know why you should incorporate alternative investments into your portfolio.
Importance Of Diversification In Investment Portfolios
Diversification in investment portfolios is essential for prudent investors. Some reasons you should consider diversifying your portfolio are:
- Preserving Capital: It helps you safeguard your money from severe losses. If one asset takes a hit, like stocks in a market crash, the others can step in to maintain the value of your investment.
- Protection Against Market Volatility: Different assets respond differently to market fluctuations. By spreading investments across various asset classes, you can mitigate the impact of market volatility on your portfolio.
- Long-Term Stability: Diversification provides stability and consistency over the long run. It allows you to reach your financial goals despite how the market fluctuates.
Diversification In Traditional Investment Landscape
- Stocks
Stocks represent ownership in a company. Various companies issue their shares, looking for investors willing to buy them against money. However, this investment option has both profitability of exponential returns and risk uncertainty. Let us discuss the benefits and limitations before investing in stocks.
Benefits | Limitations | ||
|---|---|---|---|
Capital Appreciation | Stocks offer the potential for significant capital appreciation compared to other financial investments. | Volatility | Stock prices can be highly volatile, subject to market fluctuations and economic conditions.
|
Liquidity | Stocks are highly liquid, allowing buying and selling them quickly on the stock exchange. | Risk of Loss | Stocks carry a high risk of losing your investments, especially in case of a company’s bankruptcy, drop in earnings, analyst’s expectations, corporate governance issues and negative news
|
Dividends | Some stocks pay dividends, providing a regular income stream for investors.
| Brokerage and Other Charges | This investment option involves brokerage and charges like STT, Exchange Transaction Charges, GST, etc, which reduces the net return on investment (ROI). |
- Fixed Deposits
Fixed Deposits are a type of financial investment offered by banks in which you deposit a specific amount of money with the bank for a fixed period. This period could be anywhere from a few days to several years.
Either you keep on getting monthly/quarterly interest, or upon maturity, you get your principal amount with the pre-determined interest. The benefits and limitations of FDs are as follows:
Benefits | Limitations | ||
|---|---|---|---|
Safety | Fixed deposits are considered safe investments based on bank backing. | Lower Returns | FDs typically offer lower returns than other investments like stocks and mutual funds.
|
Guaranteed Returns | FDs provide a fixed interest rate, ensuring a predictable ROI.
| Penalty On Premature Withdrawal | In case of a pre-mature withdrawal, you must pay the bank a penalty. |
Liquidity | It also provides a secure place to store surplus funds, which can be liquidated at a penal cost.
| Inflation Risk | FD returns may not keep pace with inflation, reducing real purchasing power over time.
|
- Gold
People have been investing in gold since time immemorial. You now have varied methods to invest in gold besides buying physical gold, like sovereign gold bonds, digital gold, gold ETFs, etc.
Benefits | Limitations | ||
|---|---|---|---|
Hedge Against Inflation | Gold often performs well during inflationary periods to hedge against eroding purchasing power. | No Income Stream | Unlike stocks or fixed deposits, gold does not generate any regular income, or it is nominal. |
Portfolio Insurance | Gold is a perfect hedging asset. It can act as insurance against geo-political emergencies, market crashes and financial crises, offering stability and protection to investors' wealth. | Volatility | While gold can serve as a haven, it is not immune to price fluctuations and can experience periods of high volatility. |
Diversification | Incorporating gold in the investment portfolio can enhance diversification and reduce overall portfolio risk. | Storage and Security | Physical gold requires secure storage, which may incur additional costs. |
The Need For Alternative Investments For Diversification
As an asset class in India, alternative investments like real estate and securitised debt instruments (SDIs) like lease financing, invoice discounting, startup equity, etc., have grown recently. Let us discuss why you must incorporate alternative investments in your portfolio:
- Access To Non-Market Linked Assets: An alternative investment often has no or low correlations with stock and bond markets, providing additional diversification benefits.
- Potential For Higher Returns: Alternative investments like fractional real estate and SDIs can deliver higher returns than conventional options like fixed deposits.
- Risk Management: Allocating a portion of your portfolio to alternative assets can help manage risk during market downturns.
Risks And Considerations In Alternative Investments
Despite the potential benefits, alternative investments come with their risks and considerations:
- Non-liquid: Many alternative investments have limited liquidity. Selling them at the time of funds requirement might be challenging.
- Regulation And Transparency: Some alternative investments, like startup equity, operate with less regulatory oversight, demanding greater due diligence from you.
The Bottom Line
While stocks, fixed deposits, and gold are essential parts of an investment portfolio, exploring alternative investments can provide new and exciting diversification benefits. Incorporating alternative investments will complement your traditional holdings.
Explore Grip Invest and discover various alternative investments to diversify your portfolio. It is an investor-first digital investment platform to help you access curated non-market-linked alternative investment opportunities.
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Disclaimer - Investments in debt securities are subject to risks. Read all the offer-related documents carefully. The investor is requested to take into consideration all the risk factors before the commencement of trading. This communication is prepared by Grip Broking Private Limited (bearing SEBI Registration No. INZ000312836 and NSE ID 90319) and/or its affiliate/ group company(ies) (together referred to as “Grip Invest”) and the contents of this disclaimer are applicable to this document and any and all written or oral communication(s) made by Grip Invest or its directors, employees, associates, representatives and agents. This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip Invest does not guarantee or assure any return on investments and accepts no liability for the consequences of any actions taken based on the information provided. For more details, please visit https://www.gripinvest.in/.
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