Personal Finance

HNI money: Do alternatives deserve a place in your portfolio?

Abhijit Bhave | Updated on May 12, 2019 Published on May 12, 2019

A portfolio mix of debt, equity and alternatives can help earn higher absolute returns

Asset allocation strategies primarily revolve around two major asset classes — equity and debt. But a 70:30 allocation in equity/debt in today’s market dynamics may not be enough to achieve long-term investments goals. In recent times, the attention of savvy investors has moved to another asset class, popularly called ‘alternatives’.

Investments made in avenues such as private equity (PE), venture capital (VC) funds, unlisted shares, REITs (real-estate investment trusts) and hedge funds come under the ambit of alternatives. The alternatives have a low correlation with listed equity/debt. The addition of these to an investor’s portfolio leads to diversification, thus lowering portfolio volatility and augmenting returns. A portfolio mix of debt/equity and alternatives can help investors earn higher absolute returns.

Conducive environment

India has gained the tag of the fastest-growing major economy in the world, and as projected by IMF (International Monetary Fund), is going to maintain that ranking in the near future. Regulatory changes — including the Goods and Services Tax (GST), the Indian Bankruptcy Code (IBC) and the Real Estate Regulatory Authority (RERA) — have eased the way India does business.

The result has been an increased participation of NBFCs and professional managers, leading to huge investment inflows from PE/VC funds. As of January 2019, there are as many as 125 India-based PE and VC funds in the market with an approximate corpus of $18 billion. The aggregate value of PE-backed buyouts and VC deals completed in India since 2009 is $103 billion, which clearly points towards the growth potential (source: Preqin Pro).

The attractiveness of alternative investment arises from its potential to generate supernormal returns, with a considerable amount of risk.

The allocation in alternative investments, from the investors’ portfolio perspective, should not be more than 20 per cent, in order to maintain the diversification in the portfolio at healthy levels.

The alternatives are popularly categorised into multiple sub-asset classes. Venture capital is gaining popularity in India, as investors across the wealth spectrum are looking at proportionate allocations to start-ups and early-stage companies via primary infusion or secondary investment.

VC funds generally prefer the SEBI-approved Category 1 AIF (alternative investment fund) format for fund-raising with an investment term of 5-7 years and a general expectation of 25-30 per cent IRR (internal rate of return).

Private equity investment through the PE fund route is comparatively less risky than VC funds and hence has a lower yield expectation. PE is one of the best diversification tools for an investor’s overall portfolio as it reduces the standard deviation of the portfolio.

The return expectation from private equity funds is around 20 per cent. Real-estate funds have been popular in the AIF format since 2012. These funds have been successful in delivering decent returns and simultaneously helping in portfolio diversification.

Depending on the sector, developer, region and the market, the yields in real-estate funds range from 15 per cent to 22 per cent. With the latest Embassy REIT listing, commercial property RE funds have gained in popularity. These funds offer a stable rental yield as well as capital appreciation on exit from underlying investments.

Absolute returns

The popular absolute return strategy followed by long-short funds has also gained in popularity in the UHNI (ultra high net worth individual) segment. The strategy of the funds are executed in such a way that they can gain from both sides of the market movement, thus generating alpha while completely or partially hedging the net exposure. These funds target a return of around 12 per cent per annum, which can be placed as conservative investment strategies from the investors’ view point.

The surge in investors placing bets on unlisted companies directly and through pre-IPO funds gained popularity in 2017-18. With a target IRR of 20-25 per cent, they offer a popular diversification strategy from listed equities.

To conclude, 8-20 per cent of the portfolio can be in the alternatives for diversification as well as to generate higher returns.

The writer is CEO, Karvy Private Wealth

Published on May 12, 2019

A letter from the Editor


Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Support Quality Journalism
This article is closed for comments.
Please Email the Editor
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.