India’s Alternative Investment Funds market has grown significantly in the past few years. It has been estimated that managers involved in AIFs raised a capital of Rs. 7 lakh crores in 2022, as per a SEBI report. On the other hand, safe investments like Gold, ETFs, PPFs, and mutual funds offer a safe and high returns approach but what is the difference between the two? Is one better than the other? Is there a different return amount for the two? This article answers all your questions. Read on to find out more.
What are Alternative Investment Funds and Safe Investments?
An alternative investment is a type of investment option that stands out from traditional methods. It may include investing in artwork, commodities, farmland, antiques, and bitcoins. Mainly high-net-worth individuals seek alternative investments, and it offers tax benefits that may not be available on a traditional type of investment.
Safe investments, on the other hand, may offer less return but are highly secure investments. These may include gold investments, public provident funds, and mutual funds, among others. Safe investments are low-risk investments and less likely to result in a significant loss of principal. These investments are typically associated with fixed-income securities, such as bonds, and cash-equivalent securities, such as savings accounts or Certificates of Deposit (CDs).
Alternative Investments and Safe Investments: Risk Modality?
Alternative Investment has a relatively high level of risk as compared to other investments. It can be due to its characteristics like limited liquidity, increased market volatility, and the need for more transparency. For instance, investing in real estate or private equity comes with a high return, but they also have a high risk of market fluctuations, bankruptcy, changes in interest rate, etc. Risks associated with real estate investments include market swings and economic downturns. Commodities, like gold and oil, can be extremely volatile and influenced by geopolitical events. Hedge funds may outperform standard asset classes regarding returns but have greater costs and less transparency.
On the other hand, safe investments come with a lower level of risk as they are highly liquid. Cash and CDs, for example, are very liquid and carry little danger of loss. Government and high-quality corporate bonds are also considered safe investments since they are backed by the issuing government or corporation’s full faith and credit. While these investments may provide lower returns, they are an excellent choice for investors who value stability and predictability in their investment portfolios.
The Returns: Alternative Investments and Safe Investments
Alternative investments generally have a higher return than traditional means of investments. The higher the risk, the more the returns. For instance, real estate investment is considered one of the best forms of long-term investment as it offers steady cash flow and capital appreciation over time. Similarly, private equity, another type of alternative investment, provides a high return on investment due to the unique opportunities they offer to invest in early-stage or growth-stage companies.
Commodities can be extremely rewarding if prices rise, but they are quite volatile. Hedge funds may outperform traditional asset classes regarding returns, but they often have higher costs and less transparency, so investors must carefully weigh their options.
Safe investments, on the other hand, typically offer a low return on investment. For instance, government and high-quality corporate bonds may provide slightly better yields than cash and CDs, but they are still low-risk investments. While these investments may not offer high returns, they are an excellent choice for investors who value stability and predictability in their investment portfolios.
Another difference that prevails between alternative and safe investments is the lock-in period. The majority of alternative investments have a lock-in period of 3 years. On the other hand, a safe investment like a Public Provident Fund (PPF) has a lock-in period of 15 years, after which you can either extend it for 5 more years or withdraw the money.
As a wise investor or someone who is starting with their investment journey, it is highly necessary that you carefully evaluate your options. Moreover, you should consider your goals, risk tolerance, and financial stability before making an investment decision. A balanced investment portfolio often comprises alternative investments and safe investments to reduce overall risk and maximize rewards. When making investment decisions, seeking professional financial advice is crucial to ensure you are making informed decisions and managing risk appropriately.
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