Traditional Investment vs Alternative Investment Markets
It is rightly said, ” don’t keep all egg in on basket”. this phrase is many times used for investments. As we all know that by diversifying the portfolio we can spread the risk in different assets class and can have a healthy portfolio. In order to create a lucrative portfolio, it is very important to understand which type of investments suit best to achieve goals. Investments can be categorized as traditional investments and alternative investments.
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Traditional investment market
Basically, it means investing your money into assets that are well-known. There are three types of traditional investment cash, shares, fixed deposits, and bonds. Most of them give a fixed return.
Alternative investment market
Investment in real estate, commodities, hedge funds, etc is termed as alternative investments. These types of investments require huge investments and a good understanding of the market and its impact on investments.
Let us look at the difference between traditional investments and alternative investments
1) Minimum Investments and Fees
The minimum investment requirement and the fee structure are an important distinction between traditional investments and their alternative counterparts. Traditional investments, such as mutual funds, often require minimum investments of roughly Rs. 500, and exchange-traded funds typically will require less than this. Alternative investments such as hedge funds and managed funds however often require huge investments, plus management fees of 1 to 2 percent of the fund’s assets and performance fees of 20 percent of the fund’s profit.
Another key distinction between traditional investments and alternative investments is liquidity. Investors can easily redeem their assets from traditional investments such as mutual funds, fixed deposits, shares, etc; however, in the case of alternative investments, many are illiquid investments. For example, selling a real estate property takes time.
Alternative investing is different from traditional investing in that it tends to deliver better returns. Additionally, alternative investments also produce good returns, particularly in challenging markets. According to Kate Stalter, a contributing editor of Forbes Investing, alternative investments such as managed futures and commodities delivered positive returns even during the bear market of 2008, whereas most traditional investments suffered.
Often traditional investments vary in their level of regulation from traditional investments. Public companies issuing shares and other traditional forms of investments are registered with and carefully regulated by the Securities and Exchange Commission, and their financial statements are independently audited. Alternative investments, such as hedge funds, on the other hand, have no regulatory scrutiny, and investors may be more vulnerable to manipulation with these types of funds.
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After comparing both types of investments, we can say that one must invest after studying the market and understanding his risk appetite. Both the type of investments have their own pros and cons but one must take investing decision keeping the goals in the mind one must invest accordingly
Author: Akshay Patil
About the Author: When I write I learn something new which acts as a value addition towards my career in finance.