No matter how much you earn, we all like to fill our pockets a little bit more. The unconventional way of expanding our money is investing. So what exactly is investing? In layman terms, it is the use of our income to generate more income. Putting in any financial institution or bank is also a kind of investment since it gives you return.
It’s important to invest since it ensures long term financial security and generates funding which you can use for emergency. Various ways of investing are stock and bonds. Though it attracts a lot of pockets when you invest in something which gives you higher returns there is also a higher risk of losing money.
The traditional way of investing includes well known and popular methods of investing like bonds, shares, equity, cash, and real estate. The major advantage of such investments is that they are liquid which means you have easy access to money you have invested.
- They include a high return rate
- Low liquidity situation
- They are more prone to scams and frauds
- Adds diversification
- They are complex in nature
Difference between traditional investment and alternate investment
In traditional, you invest in well-known assets like stocks, cash or bonds. Here you can easily access money at any time like you can cash your bond or stock whenever you needed. They come with a low rate of return.
In the alternate, when you invest in options like hedge funds, collectables, real estate, etc. there is a high rate of return, but are illiquid which means you will not be able to take out your invested money anytime you want.
But here, we will talk about the other side of investing known to be as alternate investing.
Understanding different Types
In private equity, funds are taken from institutional and non-institutional financial investors. These funds are used for sponsoring private companies that are budding and need investment to expand them. These capitals are then returned in the form of sale of the start-up in which investors sell their equity; in short, they exit their ownership. Then, there are direct investments whereas an investor you can directly invest in start-ups and private companies. They come with high risk as well as high returns.
In hedge funds, all the investments are pooled together to invest in different asset types. These funds work towards making money despite market fluctuations. These investors work as traders; here the hedge fund investment can range from stocks to patents.
When an individual or set of people have an idea to start a company, funds are important part and this is where venture capitals specialize in investing in new growing companies that have promising future. New companies utilize these funds to expand or for more productivity. This investment comes with a high rate of return but they are highly risky too. The company may or may not bloom, if it doesn’t you will lose your investment as well.
Another most preferred investment is investing in physical assets or real assets such as estate, oil, metal, art, jewellery, wine, and rare coins. People like investing in gold, silver or other natural resources.
People now days also invest in buying plots or houses which is investing in real estate, which gives a benefit of a steady income and financial security.
Another investment option is funds of funds; this is a process where funds are used to invest in other alternative investment funds. Target date mutual funds, hedge funds or mutual funds are few examples; here basically you are not investing in direct options such as stock and bonds.
A revolutionised platform where lender and borrower can directly engage in the process of lending and borrowing by cutting middleman and creating their own terms and payback plans, this platform is known as peer to peer lending.
To invest the money as lender we look for a safe option and good returns as well. On this platform, the process of investing money is quite hassle-free and requires less to no paperwork. There is the flexibility of choosing borrower as well.
Process of applying: This process is done online, register yourself and borrower will contact you through this platform. You can check the authenticity of the borrower and do a thorough background check as well. A credit score reflects the credibility of the borrower which avoids the situation of them being a defaulter. To make this process even more safe instead of investing in one borrower.
Advantages and disadvantages
High returns, instant, easy to apply, hassle-free and less paperwork makes it worth investing.
Comes with high credit risk and zero government protection, these are some of the few risks involved in P2P lending.
The bad and the good side of investments
These alternate investments add diversification and offer a high rate of return as well. They diversify the portfolio and helps in increasing income as well.
Risk factors in such investments are high fees associated with them and are more unstable than traditional investments such as stocks and bonds. Though it comes with high returns it means they are highly risky too. There is a lack of transparency which means that it is prone to scam
To sum up; they are becoming more popular among investors, offering diversification they are often risky and complex. Always research well the pros and cons before investing.