A clever stock investor will not rely solely on the stock market for investment needs. Do you know how? Look no further! This article covers the top alternatives to direct stock investing, complete with the pros and cons for each option. From gold to real estate to cryptocurrencies, discover new ways to diversify your portfolio and potentially increase the returns. For quick answers, read the FAQs.
Investing in the stock market is a popular investment avenue for many investors. However, solely relying on stocks for investment can be a risky proposition. The stock market is volatile, and its performance is subject to various macroeconomic, geopolitical, and company-specific factors. Therefore, to keep the volatility of the investment portfolio within acceptable limits, it is crucial to look beyond stocks. The keyword is diversification. Include a range of alternative investment options in the portfolio.
Diversification is the key to managing investment risk. By investing in different asset classes such as bonds, real estate, commodities, and alternative investments, investors can spread the risk. This way they reduce the impact of market volatility on their overall portfolio.
Alternative investments provide an opportunity for investors to earn returns that are not solely linked to the stock market. For example, real estate can provide rental income. Commodities like gold can act as a hedge against inflation. Annuities can provide a steady income stream in retirement, and cryptocurrency can offer high returns with high risk.
Looking beyond stocks is important for investors to manage risk, earn diversified returns, and achieve their investment goals.
Let’s start with a glance on the various alternatives to direct stock investing and compare them on three fronts: potential returns, volatility, and liquidity.
Investment Alternatives To Stocks: A Comparison
Here is a tabulated comparison between various alternatives to direct stock investing:
|SL||Investment Alternative||Historical Returns (CAGR)||Price Volatility||Liquidity|
|1||Equity Mutual Funds||13.3%||Medium||High|
|6||Cryptocurrency (Bitcoin)||161%||Very High||Low|
|9||Bank Fixed Deposits (10-Year)||6.5%||Low||High|
Note that the historical returns can vary depending on market conditions and other factors. The values shown above are just indicative numbers. Using these numbers, a reader can build their own perspective about these eleven investment alternatives in reference to direct stock investing.
What are The Risks of Investing Only in Stocks?
Investing solely in direct stocks can be a risky proposition Here are some of the key risks associated with this approach:
- Lack of Diversification: Diversification is crucial to reducing portfolio risk. When an investor invests in only a few stocks, they are vulnerable to the price fluctuations of those particular stocks. For instance, if the company’s stock price falls due to an unforeseen event or the broader market undergoes a correction, the investor’s portfolio will suffer.
- Market Volatility: The market always stays volatile. Stock prices can swing wildly between their highs and lows. This volatility can lead to significant losses, especially if an investor has a high concentration of a particular stock. For instance, if an investor has 30% of their portfolio invested in a company and that stock experiences a significant downturn, it could result in significant losses.
- Company-Specific Risks: Individual stocks carry company-specific risks that can negatively impact an investor’s portfolio. These risks include poor management decisions, legal and regulatory issues, product recalls, and other events. All these factors can adversely impact the company’s stock price.
- Emotional Investing: Investors who are invested only in stocks are more susceptible to emotional decisions. At times, the stock price can fall significantly even if the fundamentals of the company are intact. Too stock-concentrated portfolios can lead to rash decisions like panic selling during market downturns.
To mitigate these risks, investors should diversify their portfolios by including various alternatives to direct stock investing.
Pros and Cons of Stock Investment Alternatives
- Diversification: Alternative investments provide diversification by spreading out investments across different asset classes.
- Risk Mitigation: Investing in alternative investments can mitigate risk by reducing volatility in the portfolio.
- Exclusive Portfolio: Majority stock investors do not maintain a well-diversified portfolio. Investing across different asset classes makes one’s investment portfolio exclusive and unique. This uniqueness can bring with it extraordinary outcomes over time.
- Averaged Returns: Stock investing is risky but careful investing in stocks can compound high returns.Including other asset classes in the portfolio will lower the average return of the portfolio.
- Reduced Liquidity: Some alternative investments like real estate, physical gold, etc are not as easy to sell as stocks. This brings down the liquidity of the portfolio.
- High Fees: Alternative investments often incur higher fees and expenses, this reducing the overall returns.
- Complexity: Handling multiple asset classes makes portfolio management more complex. It requires a deeper understanding of all the asset classes (included in the portfolio) before investing and also in its onward upkeep.
- Weaker Regulations: Some alternative investments (like cryptocurrency, physical real estate, etc) are not subject to the same tighter regulations as traditional investments, making them riskier for investors.
Top Alternatives To Direct Stock Investing
- Equity Mutual Funds
- Exchange Traded Funds (ETFs)
- Real Estate (Property)
- Cryptocurrency (Bitcoin)
- Real Estate Investment Trusts (REITs)
Equity Mutual Funds
“Investing in equity mutual funds is a great way to diversify your portfolio while enjoying the benefits of equity investing. These funds are managed by experienced professionals who use their expertise to identify high-potential companies and generate returns for investors.”– Nitin Rao, CEO of InCred Wealth
Equity funds pool the investments of various investors and create a diversified stock portfolio. Professional fund managers do this task of portfolio building. This allows individual investors to access a diversified basket of stocks. Even with a small SIP amount of Rs.500 per month, people can access a mutual fund’s portfolio. A lot of stocks cannot be bought with a small sum like Rs.500, but it is possible with mutual funds.
Equity mutual funds in India have delivered attractive returns over the long term. According to data from Value Research Online:
- The average 10-year CAGR for equity mutual funds in India is around 12.5%,
- While the Sensex has delivered around 9.6% over the same period.
- One of the popular equity mutual funds, HDFC Top 100 Fund, has delivered a CAGR return of around 14.5% over the last 10 years.
Other benefits of equity mutual funds:
- A well-managed mutual fund scheme can beat the returns of an average investor who invests in individual stocks. For example, an investor invested Rs.1 lakh in HDFC Top 100 Fund in 2011. It grows to Rs. 4.4 lakh in 2021 at 15.7% per annum. On the other hand, an investor invested in an individual stock like Tata Motors in 2011. The return would have been around 8% CAGR over the last 10 years.
- Mutual funds also diversify the risk by investing in a portfolio of stocks across various sectors, reducing the risk associated with stock picking.
- Equity funds offer liquidity, which means investors can easily buy and sell mutual fund units.
“One of the biggest advantages of investing in equity mutual funds is the convenience and ease of investing. With just a few clicks, investors can gain access to a diversified portfolio of stocks without having to worry about stock selection or portfolio rebalancing.”– Harsh Jain, Co-founder and COO of Groww
Exchange Traded Funds (ETFs)
“The advantage of investing in exchange-traded funds (ETFs) is that it offers exposure to a wide range of assets in a single investment. ETFs are also more tax-efficient and have lower fees compared to mutual funds.”– Abhishek Soni, CEO, Upwardly
Exchange Traded Funds (ETFs) are becoming increasingly popular among Indian investors. It has become a viable alternative to traditional stock investing. ETFs offer several advantages over individual stock picking. Let’s explore why.
Why ETF are preferred over stocks and mutual funds?
- Diversification: ETFs invest in a basket of stocks (like mutual funds) and as such, provide investors with exposure to a wide range of companies in a single transaction. This diversification helps to reduce the risk of investing in individual stocks. How? The performance of one stock may be offset by another stock in the same ETF.
- Liquidity: Unlike traditional mutual funds, ETFs can be bought and sold throughout the trading day on the stock exchange. ETFs behave just like stocks. This makes it easier for investors to enter and exit positions.
- Expense Ratio: ETFs tend to have lower expenses than traditional mutual funds. Since ETFs are passively managed and traded on the stock exchange, they have lower operating costs than actively managed mutual funds. This can lead to higher returns for investors over the long term.
The most popular ETF is the Nippon India ETF Nifty 50 BeES. It tracks the performance of the Nifty 50 index, which is a benchmark of the top 50 companies listed on the NSE. The ETF has generated an annualized return of approximately 12.77% since its inception.
“ETFs can be a great alternative to individual stocks for investors looking to build a diversified portfolio. They offer exposure to entire sectors, countries, or asset classes, and can be traded like stocks, making them a flexible and convenient investment option.”– Jeffrey Kleintop, Chief Global Investment Strategist at Charles Schwab
Real Estate (Property)
“Real estate can provide attractive long-term returns and a hedge against inflation, making it a good addition to a diversified portfolio. It also offers the potential for steady income through rental yields.”– Niranjan Hiranandani, Co-founder and MD of the Hiranandani Group
When it comes to investing, people often think of the stock market as their primary option. However, investing in real estate, particularly residential and commercial properties, can also be a lucrative alternative. Real estate investing can provide a steady income, tax benefits, and potential appreciation in value.
In India, investing in real estate has been a popular choice for many investors over the years. The country’s growing population and economy have created a high demand for housing and commercial spaces. According to data from the National Housing Bank’s RESIDEX the average price of India’s residential properties, in the last 10 years, has increased by about 7.8% per annum. Similarly, commercial properties have also seen a steady increase in value, particularly in prime locations like Mumbai and Delhi.
Benefits of real estate investing:
- Cash flow: One of the advantages of investing in real estate is the potential for steady rental income. A well-located and well-maintained property can provide a reliable source of passive income.
- Tax Efficient: In addition, rental income from real estate is often taxed at a lower rate compared to other sources of income, providing tax benefits to investors.
- Capital Appreciation: Real estate investing can also provide the potential for long-term appreciation in value. While property prices can fluctuate in the short term, over the long term, properties in prime locations tend to appreciate in value due to growing demand.
However, investing in real estate also comes with some risks. Property prices can be affected by factors such as economic downturns, changes in government policies, and natural disasters. Managing properties can also be time-consuming. Moreover, investing in a property is a very capital-intensive task.
Real estate is an asset class that is independent of equity. Hence, any changes in the equity market do not affect property prices. In fact, there is a belief that their prices move in the opposite direction. This is the reason why a property provides excellent diversification to the portfolio.
“Real estate can be an effective alternative to stocks and bonds for investors looking for a stable and predictable income stream. It also offers the potential for capital appreciation over the long term.”– David Lynn, CEO and Co-founder of Everest Properties
“Bonds are a low-risk investment option that can provide a reliable stream of income and help diversify a portfolio. They can also act as a hedge against inflation and provide a cushion during market downturns.”– Suresh Sadagopan, Founder of Ladder7 Financial Advisories
When it comes to investing, bonds are often overlooked in favor of stocks. However, corporate and government bonds can be a great alternative for those who are looking for more stability in their portfolio.
Bonds are essentially IOUs issued by governments or corporations. When you purchase a bond, you are essentially loaning money to the issuer for a set period of time. In return for this loan, the issuer promises to pay you a fixed rate of interest. They will also repay the principal amount at maturity.
One of the biggest advantages of bonds is their stability. Unlike stocks, which can be highly volatile, the price of bonds is relatively stable. It is a great option for investors who are looking to preserve capital or generate steady income.
- Corporate bonds are issued by companies to raise money for various purposes. They typically offer higher interest rates than government bonds. But the associated risk with corporate bonds is higher.
- Government bonds, on the other hand, are issued by the government to make up for its fiscal deficit. They are generally considered to be very safe investments. Why? Because it is in the hands of the government to raise taxes or print money to repay their debts.
- In India, typical government bonds issued bonds are Sovereign Gold Bonds (SGB), National Savings Certificates (NSC), and Public Provident Funds (PPF). These bonds offer attractive interest rates and tax benefits to investors.
- Investors of corporate bonds shall do their due diligence and invest in companies with strong financials and good credit ratings. For example, in 2018, Tata Steel Ltd. issued a bond with a 9.15% coupon rate, which attracted a lot of investors.
“Bonds can be a great way to generate steady income while reducing the overall risk of a portfolio. They are particularly attractive for retirees or other investors looking for stable, low-risk investments.”– John Kvale, Chief Investment Officer at J.K. Financial, Inc.
“I think that bitcoin is a good thing…I think it’s a store of value, a sort of digital gold.”– Tyler Winklevoss, entrepreneur and investor
Cryptocurrencies, particularly Bitcoin, have gained popularity as an alternative investment option in recent years. Bitcoin is a decentralized digital currency that operates on a peer-to-peer network. It offers investors several unique advantages over traditional investments like stocks.
- One of the biggest advantages of investing in Bitcoin is its potential for high returns. Over the past decade, Bitcoin has generated an annualized return (CAGR) of 196.7%. Traditional investments like stocks or gold have much lower returns.
- Bitcoin also offers investors the potential for diversification as it is not closely correlated with other asset classes like stocks or bonds.
- Bitcoin is more transparent and secure. Bitcoin transactions are recorded on a public ledger called the blockchain, which provides transparency and security. There is no need for a central authority, like a central bank (RBI), to validate the transaction happening in Bitcoin.
- Bitcoin is a highly volatile investment. Its value can fluctuate rapidly and unpredictably, making it a high-risk investment.
- The lack of regulation in the cryptocurrency market makes it vulnerable to fraud, hacking, and market manipulation.
In India, the Reserve Bank of India (RBI) has prohibited financial institutions from dealing with cryptocurrencies, but the ban has been overturned by the Supreme Court. However, the lack of regulatory clarity in the Indian market means that investing in Bitcoin can still be risky.
“Investors should only allocate a small percentage of their portfolio to cryptocurrency and focus on diversifying their investments across other asset classes.”– Kunal Shah, co-founder of CRED and serial entrepreneur
“Gold has historically been a good hedge against inflation and a safe haven during times of market turmoil. As such, it can play an important role in a diversified investment portfolio.”– Anil Rego, Founder and CEO of Right Horizons
Gold has always been a popular investment option among Indians. Investors have been investing in physical gold for centuries. But with the advent of technology, gold ETFs and Sovereign Gold Bonds (SGBs) have become a more convenient way to invest in gold. Here are the pros and cons of each of these gold investment alternatives.
Pros and Cons:
- Physical gold is tangible and can be stored at home. But its liquidity is not as high as stocks. Moreover, keeping physical gold at hoes is also not safe.
- Gold ETFs provide easy liquidity as they are traded on the stock exchange like individual stocks.
- SGBs are a relatively new investment option that was launched by the government of India. They offer an annual interest rate (2.5%) and are also tradable on the stock exchange.
- Gold works as an inflation hedge. Its price remains more stable during times of uncertainty.
- Gold has delivered an average annualized return of around 10% over the past 20 years.
- Gold prices are also volatile. It is affected by global factors like the US dollar, geopolitical tensions, and central bank policies.
Physical gold is a traditional investment option. Gold ETFs and SGBs offer convenience and liquidity. Overall, gold can be a good alternative for stock investing, and investors should consider adding gold to their investment portfolio for diversification and hedging purposes.
“Gold is a unique asset in that it is both a commodity and a currency. It has no credit risk and is not subject to the same market forces as stocks and bonds. As such, it can provide valuable diversification benefits to a portfolio.”– George Gero, Managing Director at RBC Wealth Management
“Annuities can be a valuable addition to a retirement portfolio because they offer a guaranteed stream of income for life. However, investors need to understand the different types of annuities and their associated fees before investing in them.”– Rajiv Jamkhedkar, CEO, Nippon Life India Asset Management
Annuities are a financial product that can be considered as an alternative to stock investing. It provides a stream of income to the investor. One can invest in Annuities in lump sum investment or a series of payments. Annuities are typically offered by insurance companies and can be customized based on the investor’s requirements.
- Annuities provide a guaranteed income stream to the investor, which can be a reliable source of income during retirement. Including annuities in the portfolio can avoid the volatility associated with stock investing.
- Annuities can also offer tax benefits to investors.
- Deferred annuities allow investors to invest money now and take the payouts at a later date. For example, invest a lump-sum amount today and draw monthly income after 15 years from today.
- Immediate annuities start generating the income stream right after the time when the investment is made.
- Variable annuities allow the investor to choose from a range of investment options.
- The National Pension System (NPS) in India provides an annuity component that allows investors to receive a regular income stream after retirement. This annuity is managed by the Life Insurance Corporation of India (LIC) and provides investors with a guaranteed income stream for life.
“Annuities are a great way to secure a guaranteed stream of income during retirement, but investors should be aware of the fees and the terms and conditions.”– Tom Hegna, retirement planning expert
Real Estate Investment Trusts (REITs)
“Real Estate Investment Trusts (REITs) offer a unique investment opportunity that allows investors to invest in income-generating real estate properties without actually owning them. However, investors should carefully evaluate the underlying assets and management team before investing in REITs.”– Dheeraj Singh, Head of Investments, Taurus Asset Management
Real Estate Investment Trusts (REITs) have gained popularity in India as a good alternative investment option to stocks.
A REIT is a company that owns, operates, or finances income-generating real estate. Investors can invest in REITs by buying shares in these companies. REITs in turn generates regular income primarily in the form of lease rents.
In India, REITs are regulated by SEB. REITs are required to distribute at least 90% of their rental income as dividends to investors. This ensures a regular flow of income to investors, making it a suitable investment option for those seeking steady returns.
India has the following companies operating as REITs:
- Embassy REIT: It has a market cap of about 28,000 crores. Currently, its dividend yield is close to 7%.
- Mindspace REIT: It has a market cap of about 18,000 crores. Currently, its dividend yield is close to 6%.
- Brookfield REIT: It has a market cap of about 8,900 crores. Currently, its dividend yield is close to 7.4%.
REITs offer several advantages over direct investment in real estate.
- Firstly, investing in REITs is not capital intensive like physical property. By investing in REITs, investors can gain exposure to the real estate market with a lower investment amount.
- Secondly, they provide liquidity to investors as REIT units are listed on the stock exchange and can be bought or sold easily (like stocks).
- Thirdly, they offer transparency in terms of property ownership, property management, and rental income. Such information helps investors make informed investment decisions.
- Fourthly, through REITs, retail investors can easily invest in quality commercial properties. Over time, such properties provide excellent dividend payouts.
“Investors should do their due diligence before investing in REITs and consider factors such as the quality of the underlying assets, the track record of the REIT sponsor, and the potential for rental income and capital appreciation.”– Vikaash Khdloya, Executive Director and Head of Capital Markets at Cushman & Wakefield India
How To Build A Diversified Investment Portfolio
Building a diversified investment portfolio is an essential step toward achieving long-term financial goals. As a 35-year-old individual, it is recommended to focus on a combination of asset classes such as equities, bonds, real estate, and gold. Here is how you can build a diversified portfolio using the investment alternatives we have discussed:
- Equity Mutual Funds and ETFs (60%): A good starting point for building your portfolio would be to allocate 60% of your investment towards equity mutual funds and ETFs. For instance, one can invest in a combination of HDFC Top 100 Fund, Mirae Asset Large Cap Fund, and Nippon India ETF Nifty 50 BeES. This would provide you with exposure to a diversified set of stocks, reducing your risk of loss due to market volatility.
- Real Estate (20%): One can invest 20% of funds in real estate. One can choose either a physical rental property or a REIT. For instance, you can consider investing in Embassy REIT or Mindspace Business Parks REIT. In Tier-1 cities, a 2-BHK flat can give a rental yield of 4%. At current prices, REITs are providing a dividend yield of about 6.5%.
- Gold (10%): One can invest about 10% of funds in physical gold, gold ETFs, or sovereign gold bonds. For instance, the SBI Gold Fund or the Axis Gold ETF is a good alternative.
- Bonds (10%): Allocating at least 10% of funds to the government or corporate bonds is advisable. For instance, the Bharat Bond ETF or the HDFC Corporate Bond Fund are good alternatives.
A diversified investment portfolio provides exposure to a variety of asset classes. It thereby reduces the risk of loss due to market volatility.
It is important to review and rebalance your portfolio periodically to ensure it remains aligned with your long-term financial goals.
“Investors should always diversify their portfolio beyond stocks to mitigate risks and ensure long-term financial stability. Alternative investment options like real estate, gold, and bonds can provide stable returns with lower volatility compared to direct stock investments.”– Rakesh Goyal, Director, Probus Insurance
There are several alternatives to direct stock investing that investors can consider to diversify their portfolios and mitigate risks. Each alternative has its own pros and cons, and investors must carefully evaluate their investment goals, risk appetite, and financial situation before making any investment decisions.
Equity mutual funds and ETFs provide investors with a way to invest in the stock market indirectly. Gold and real estate are tangible assets that offer a hedge against inflation and geopolitical risks. Annuities provide a guaranteed income stream in retirement. Bonds offer a fixed income with lower risks compared to stocks. Cryptocurrency offers unique investment opportunities with potentially high returns. They also come with higher risks and regulatory challenges.
Overall, diversification is key to building a resilient investment portfolio that can weather market volatility and achieve long-term financial goals. By understanding the pros and cons of different investment alternatives and applying appropriate risk management strategies, investors can build a well-rounded portfolio that suits their individual needs and preferences.
The top alternatives to direct stock investing include equity mutual funds, ETFs, gold, real estate, REITs, annuities, cryptocurrency, and bonds.
Choose an investment alternative that aligns with your financial goals, risk tolerance, and investment time horizon. Do thorough research and seek advice from financial professionals before making any investment decisions.
Risks associated with alternative investments include market volatility, liquidity risk, counterparty risk, regulatory risk, and interest rate risk.
Alternative investments can be complex and require a deeper understanding of the market. Beginner investors are advised to seek the guidance of financial professionals before investing in alternative investments.
Investors can mitigate risks by diversifying their portfolios, performing thorough research, choosing investments with a proven track record, and seeking advice from financial professionals. Additionally, investors should have a clear understanding of the associated risks before making any investment decisions.
Have a happy investing.
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