In India, wealth is largely concentrated in the form of savings in bank accounts and FDs. Traditional physical assets such as real estate and gold are largely perceived as the primary wealth-generating options. While equity stocks were a preferred choice for a certain class of investors, we have seen huge participation in mutual funds in the last two decades. Today, a typical individual investor portfolio comprises some equity stocks or mutual funds, debt mutual funds, tax savings/protection plans, and FDs. However, alternative investments usually comprise only 1 per cent of the portfolio in India compared to the global average of 10-20 per cent.
Traditional debt-based investments usually yield a single-digit returns per annum, not adequate to achieve inflation-adjusted financial growth. Hence, the individual investors need structured fixed-income alternatives offering higher returns, lower risk than equity, and more predictability for short to medium-term needs. While these products existed for quite some time, they were until recently, only accessible to institutions, HNIs, and UHNIs in India.
With the emergence of digital platforms for alternative fixed-income investments, the entry barriers have been lowered, and there is more democratic access to these unconventional channels of wealth creation. These platforms do necessary due diligence about the robustness of the business, financial performance, and the risk involved enabling the investors take more informed decisions based on their present investment portfolio, financial goals, and risk appetite.
What’s on offer
Below are some of the fixed-income product categories that investors can consider adding to their portfolios.
Asset-Backed Leasing – A house serves as an asset providing a regular income to the investor or the landlord. Similarly, there are other assets such as vehicles, equipment, commercial buildings, etc., which are leased by companies in construction, transportation, mining, or other industries. The income from asset-backed leasing is steady and fixed, and the investment is secured by the underlying asset. While a typical opportunity in this segment starts at ₹10+ crores, digital alternative investment platforms reduce the ticket size to around one lakh with an investment period ranging between 12-36 months.The ROI from such arrangements floats between 14-20 per cent.
Corporate Debt – As the name suggests, corporate debt is the loan provided to corporates. In recent years, corporate debt is gaining popularity in India because of the unpredictability and volatility of the stock market plus considerably lower returns by other traditional debt products. Corporate debt can be listed or unlisted, typically secured, and offers annualised returns between 8-14 per cent on a tenure of 6 months to 10 years. These products provide portfolio diversification leading to a wider exposure with risks and returns determined by the company’s financial strength, in addition to other factors.
Venture Debt – Venture debt is a corporate loan provided to startups and early-stage companies. These companies raise venture debt as a supportive source of capital apart from equity investments, and it is often used to fulfill their growth and working capital needs over a shorter period. A typical venture debt tenure is 15-36 months, and it yields 15 to 24 per cent annualised returns.
Invoice Discounting – Invoice discounting has been around in the business world for quite some time. However, it was not earlier explored as a form of investment, especially by individuals since the minimum investment size used to be very big. This limitation has been done away by the digital alternative investment platforms bringing down the minimum investment size to ₹1 lakh for individual investors. For a tenure of 30 to 90 days, the returns range between 10 to 14 per cent.
Risks and rewards
The world of investments would become utopian without any risks if the investor gained a pre-determined ROI as per the schedule. Alternative investments are no different.
There are risks associated with alternative fixed-income investments as well including liquidity risk, credit risk, and market risk. Some risks are deal-specific and may not be applicable to others. Investors should consider all the information provided and make informed investing in these varied categories.
It is also recommended to diversify amongst different borrowers within these product categories. Since these are fixed-income investments, they are not volatile, unlike stock markets.
The risks involved with alternative investments can be significantly mitigated when choosing the right platform and team. A digitally driven investment platform backed by a strong experienced team which ensures transparency of returns and undertakes rigorous due diligence to mitigate the risks should be the ideal one.
For instance, in invoice discounting, the platform provider would check the credibility of the organizations involved, credit history, verification of invoices, evaluate the ability to make repayments, etc. before bringing the opportunity to borrowers. Similarly, when you go for asset-backed leasing, the operating history, financial performance, promoter credibility as well as the management of the firm seeking the lease would be analysed and verified before the opportunity is available for investing.
Indian investors need to rethink their financial investments with an eye on optimising the balance between financial security, wealth creation, tax saving, and the generation of passive income. This is where investing about 10 to 20 per cent of the overall portfolio into the alternative investments discussed above can yield the desired results. With inflation, possible global recession, and even disruptions like the pandemic becoming known variables, it is time that the investors consider all options toward their wealth-creation journey.
The author is co-founder of Jiraaf