New-age investment avenues: Are they safe for your hard-earned money?

The investment landscape has gone through a sea change over the last decade as technology becomes the core driver. The amalgamation of tech and money management has brought about interesting investment options, many of which the common investor doesn’t understand much about.

Here is an impartial look at ‘hot’ asset classes that everyone is talking about.

Cryptocurrencies

Digital currencies are undoubtedly the most prominent of all new-age asset classes. The underlying blockchain technology has widespread use cases, which takes away the threat of crypto assets as just being a flash-in-the-pan. With 12-15 crypto exchanges operating in India, today investors can tailor their exposure over a basket of currencies and portfolios.

However, the high volatility and regulatory/ legal uncertainty make cryptocurrencies an unfavourable investment. Interested investors could dip their toes just to get a feel of how it works.

NFTs

Non-Fungible Tokens are a digital representation of a unique asset. From art, music, collectibles, GIFs and videos, and more, there are a plethora of options. The realm of tokenisation is only limited by the ingenuity of the creators. Like cryptocurrencies, NFT data is stored on blockchain’s digital ledger to ascertain ownership and authenticity.

NFTs are, therefore, subject to the same scope of volatility as cryptocurrencies. Additionally, investing in NFT requires you to have strong content knowledge and a pulse of what unique asset will be appealing to people. NFTs are highly speculative and may be considered by high-risk investors as a part of their alternate investment portfolio with an understanding that the asset class is illiquid and may lose significant or all value.

InvITs

Infrastructure Investment Trusts are pooled investment vehicles like mutual funds that invest in a bouquet of infrastructure assets such as roadways, highways, power plants, transmission lines, gas pipelines, etc., monetised by the government.

InvITs provide the opportunity to invest in long-term, income generating public utility assets. The cash flow generated is paid out as dividend to investors. Most InvITs can deliver returns superior to other fixed-income assets and can make for a good long-term quasi debt product because they can generate consistent income.

ESG

ESG portfolios invest in sustainable businesses with respect to their Environmental, Social and Governance impact (ESG). The companies have to go through stringent compliance checks in addition to satisfy regulatory benchmarks to become eligible for consideration.

ESG represents a new and relevant investment theme that could pay rich dividends in due course. In addition to building an ethical and socially conscious business, these companies will be ahead of the curve as regulatory protocols change, giving them the opportunity to enhance market share and generate shareholder value.

Long-term investors can contemplate a small allocation towards ESG funds, considering funds in this category have been recently launched in India and hence cannot be judged based on performance.

P2P

Peer-to-peer lending is a means of debt financing or crowd lending aggregated through a fintech platform. The pooled funds are diversified basis time to maturity, risk and return. P2P borrowers are usually new to credit or overleveraged individuals or small businesses that are not eligible for bank lending and willing to pay a premium.

With the inherent risk involved, P2P lending offers returns higher than other interest generating assets. The rollovers are frequent as the repayments are on a monthly basis. Deployments, if any, should only be made through RBI registered fintechs.

Equity crowdfunding

Equity crowdfunding or pre-seed funding allows individuals to invest in promising startups at an early stage via an online platform or aggregator. In addition to conducting adequate due diligence, investors should be mindful that the gestation period between idea to fruition could be anywhere from five to 10 years or more, before they see any real returns.

While investing in the right startup could generate exponential returns, data suggests that the success rate for startups is as low as 5-10 percent. Which means an active seed-investor would have to find at least 10 investable opportunities to have a reasonable chance of success. Furthermore, there is very little recourse for investors in case of default or fraud. With such low odds, one should be careful about the percentage of net worth that is invested in a crowdfunding event.

VC funding

The burgeoning startup economy and slew of IPOs have helped propel Venture Capital investments in India. However, investors should not get blindsided by success stories – for every startup that has grown to become a unicorn, there are thousand others that have not matched up.

VC funds are high risk investments with a high entry threshold, usually above Rs 1 crore, therefore one needs to invest as per their risk appetite and asset allocation. Investors also need to brace for a long incubation period and possibility of further equity dilution, if the startup gains traction.

It is important that investors assess an asset class’ fit and risk profile vis-à-vis their overall portfolio. Investments, if any, should be made through agencies that are tenured and accredited by RBI /SEBI.