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Portfolio With Alternative Investments

Alternative Investment Products

Speaking of alternative investment products, there is a range of products that you can include in your portfolio. The world of alternative investments is huge and is ever-expanding.

 

Below, we have explained some of the common products:

 

1. Commodities

 

Commodities are an important investment product and a popular one. To put it simply, commodities are the basic goods we use every day – coffee, tea, orange juice, crude oil and others. These commodities are traded in the market, more specifically commodities exchanges. Some are more popular than others. 

 

As an investor, you can participate in the price movement of certain commodities. They can be an important addition to your portfolio and a great method to diversify it. 

 

We have a detailed module about commodities. We recommend you read it before taking the plunge into the commodities market. 

 

Click here to read it. 

 

Speaking of commodities, gold is one of the most popular commodities traded worldwide. Traditionally, Indians have invested in gold jewellery and bars as a method of savings. However, thanks to the developments in the commodities market, various modes are available for investing in gold such as ETFs, futures and options and others. 

 

In our module about Gold, you can get a comprehensive understanding of the precious commodity and how you can invest in it. 

 

Click here to read the module. 

 

2. Foreign exchange

 

Different countries have different currencies and their values are determined based on their supply and demand. Usually, a currency’s value is pegged to another country’s currency such as the US Dollar or Euro. These currencies are known as foreign exchange or forex. 

 

Forex is traded in the foreign exchange market and is usually traded in pairs known as currency pairs. EUR-USD is the most popular currency pair where the value of the Euro is determined by the value of USD and vice versa. 

 

The foreign exchange market is a highly volatile market with extensive opportunities to earn profits. However, the downside is that since the market is very volatile, you can make losses too. 

 

Hence, we strongly recommend having a thorough understanding of foreign exchange and the forex market before diving into the market. 

 

Click here to read our detailed module about foreign exchange. 

 

3. Cryptocurrency

 

Cryptocurrencies have become a very popular product in the last few years. These are digital or virtual currencies that are based on a technology known as the blockchain. Unlike normal currencies which are issued by a country’s government agency, cryptocurrencies are issued by solving very complicated mathematical problems and are decentralized. Since they are not issued by a government, they are not controlled by any government as well. 

 

While cryptocurrencies are a good addition to any portfolio, they are inherently complicated. Hence, understanding them is imperative before venturing out into the area. 

 

We have an exhaustive article about cryptocurrencies. Click here to read about it. 

 

4. Private Equity

 

Private equity, as the name suggests, involves investing in private companies that are not listed in a public exchange such as the Bombay Stock Exchange or the National Stock Exchange. This investment can be done through firms or companies. The money can be used in a variety of methods such as buyouts of public companies, making acquisitions to be used as working capital and others. 

 

This is a kind of alternative financing that companies seek from the market. As an investor, you will hand out your money to private equity firms, who in turn, will invest the money into companies that show promise. Private equity firms charge management and performance fees from the investor. 

 

5. Venture Capital

 

Venture capital or more popularly VC is a kind of private equity where the money is provided to startup companies and small businesses to help them grow. Normally, venture capital is provided by high net worth investors, investment banks and other financial institutions. The investment may or may not be in the form of money. It can be in the form of technology, managerial expertise and other assistance. 

 

Venture capital is risky in its core nature since it invests in startups with little or no track records. However, historically, the returns have also proved to be higher. Moreover, through venture capital, investors get equity in the company and may or may not be involved in company management. 

 

6. Hedge Funds

 

Hedge funds have become a very popular option in the last few years. Hedge funds are a kind of investment company that invests very aggressively. At its core, it is like a mutual fund but it invests in highly risky assets. So although they may earn very high returns, the loss potential is also substantial. 

 

Hedge funds use a variety of strategies to earn returns for their investors. They invest in derivatives and make aggressive use of leverage. Hedge funds are not easily accessible to retail investors, only accredited investors have the option of investing in them.

 

7. Collectables

 

People often decide to invest in collectables such as art, antiques, wine, vintage cars, etc. The value of these products go up as time passes and people make substantial profits by selling them at a later date. However, the key lies in choosing the right product. Not every piece of art is a classic, right?

 

As we have mentioned before, the world of alternative investments is huge. From buying a bottle of wine to investing in complicated cryptocurrencies – a wide range of options is open to you. 

 

Choosing wisely is the key in this scenario. Gather sufficient knowledge before you venture out into the world of alternative investments. With the right product mix, it is possible to strike a balance between liquidity, risk and return in your portfolio and achieve the right kind of portfolio diversification. 

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Units 9/10