- Date : 05/06/2021
- Read: 4 mins
While 90% of your investment portfolio could be conventional, feel free to go experimental with the remaining 10% via alternative asset classes.
Financial advisors and investment professionals reiterate the need to have a risk-adjusted diversified portfolio to ensure that you meet your financial goals without taking undue risk. While 85%-90% of your portfolio should be structured around conventional, time-tested options such as bank deposits, mutual funds, bonds, and PPFs, as a young woman you can also consider some alternative asset classes that give your overall returns an extra edge.
Here are four popular options you could consider.
An Initial Public Offering or IPO is a great avenue to build your stock selection skills and test your risk tolerance without jumping into the far end with something too risky. It also gives you an opportunity to invest in a potentially strong company at an early stage and at an affordable price. Though investing in an upcoming IPO does not guarantee an upside on listing, by selecting a fundamentally strong company you can significantly improve your chances of long-term gains.
It is important that you conduct adequate due diligence to maximise your chances of picking a high growth stock. Read the prospectus carefully, get an overview of the company’s long-term plans, how it intends to deploy shareholder funds, etc. Also gauge the interest of qualified institutional buyers (QIBs) who will have better access to company information as compared to retail investors.
Related: How to invest in stocks like a pro
2. Private equity funds
Private equity investments work just like a mutual fund investment. The only difference is that the fund in this case invests in private businesses and other assets, with a view to sell the stake later at a better valuation. There can be different types of PE funds, each with a different strategy and investment mandate. This could range from venture capital funds that invest in start-ups, growth capital funds that help a business scale up in return for a small ownership, to leveraged buyout funds (LBO) that take up majority ownership in a business.
There are also options to invest in sector-specific funds (such as real estate or infrastructure), as well as funds of funds that do not directly invest in a business, but into portfolios of other PE funds.
PE funds look to invest in businesses that are considered as diamonds in the rough and have the potential for high returns. At the same time, they carry a higher risk and are relatively illiquid as they cannot be publicly traded. The gestation period for PE funds is 3-7 years, so one should only consider them with a long-term view.
Related: Are bonds really safer than stocks?
3. REITs and InvITs
Most Indians look to invest in a real estate as a means to achieve portfolio diversification, build a long-term asset, and earn passive income via rent. However, the high investment threshold (on account of steep real estate prices) make it especially difficult for young women to add this asset class to their portfolio.
Investing via Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) make it possible to gain fractional ownership of different real estate assets such as large-scale construction projects, high rent yielding commercial real estate, and income generating public projects such as highways, power transmission lines, gas pipelines, etc.
The returns on these funds are directly linked to the property market, so issues like unsold inventory or tenant defaults are potential risks. The investment gains/interest earnings are distributed as dividend income to investors. REITs with a good portfolio of projects can deliver returns superiors to most fixed income instruments.
4. Hedge funds
Hedge funds use advanced financial strategies (options, derivatives, short-selling, etc.) to maximise returns from other asset classes like the stock market, bond market, commodities, etc. They use various forms of leverage to amplify returns, which also magnifies risk. While most hedge funds these days are open-ended, some may have a lock-in period or penalty on premature exit. Hedge funds are a high-risk, high-reward option, so one should invest only an amount they are not afraid to lose. Besides, look at these risks you must watch out for while investing.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment advice. You should separately obtain independent advice when making decisions in these areas.