Alternative Investment
Also written Alternative investments
A financial asset outside the conventional categories of stocks, bonds and cash — defined by what it is not, and marked above all by illiquidity.
In plain language
There is no neat global list of what counts as an alternative investment. The industry grew piece by piece. So the workbook defines it by what it is not. Alternative investments are investments other than traditional investments.
It quotes Investopedia: "an alternative investment is a financial asset that does not fall into one of the conventional investment categories." Those usual categories are stocks, bonds and cash.
These investments grew up to serve sophisticated investors. These are institutions that manage large pools of money, and high net-worth individuals. They can take more risk, and they want more than the usual options offer. The deal is a chance of higher return in exchange for higher risk. The aim is to complement (add to) traditional investments. Over the long term, they should improve risk-adjusted returns, that is, returns for the risk taken.
If one word sums them up, the workbook says it is illiquidity. They cannot easily be turned into cash. Either they are not traded on a market, or they are complex structures with no ready market.
How it works
Table 1.1 — the workbook's three-way map
| Traditional | Alternative | Dual |
|---|---|---|
| Listed equities | Private equity — direct investment in unlisted stock | Closed-ended debt funds with illiquid assets such as real estate |
| Listed debt securities | Direct investment in unlisted debt or loan capital | Exchange-traded security receipts of securitisation companies, SPVs, ARCs |
| Open-ended mutual funds | Direct investment in real estate and infrastructure project SPVs | REIT and InvIT units |
| Exchange-traded simple derivatives used to manage risk | Direct investment in commodities | Mutual funds with alternative or contrarian strategies |
| ETFs | Hedge funds; complex structured products and OTC derivatives such as CDOs; distressed asset and special situations funds |
Avenues (1.2). Venture capital, private equity, hedge funds, OTC and exchange-traded derivative contracts, real estate and infrastructure, commodities, precious metals, arts and antiques — plus gems, film funds, sports, vintage wines, stamps and collectibles, and returns offered through FinTech platforms.
Scale. USD 22 trillion in AUM across all alternative asset managers globally, as of December 2023.
Benefits vs limitations (Table 1.2). Diversification beyond traditional avenues, better risk-return trade-off, alpha from off-market strategies, growth capital for businesses banks will not fund, experienced managers and some customisation — against complex structures and documentation, less transparency, harder return measurement, illiquidity from long investment cycles, and no regular income.
Not the same as an AIF. An Alternative Investment Fund is a SEBI-registered vehicle — a privately pooled fund. "Alternative investment" is the asset territory such vehicles work in.
A worked example
Illustrative figures. Arvind Rao, a Pune-based HNI, holds Rs 10 crore of investments, plus a bank FD and the flat he lives in:
| Holding | Rs crore | Class per Table 1.1 |
|---|---|---|
| Listed large-cap shares | 4.0 | Traditional |
| AAA-rated listed bond | 1.0 | Traditional |
| Nifty ETF | 1.0 | Traditional |
| Unlisted shares of a start-up | 1.5 | Alternative |
| Commercial office unit, let out | 1.5 | Alternative |
| REIT units | 1.0 | Dual |
| Total | 10.0 |
Traditional = 4.0 + 1.0 + 1.0 = Rs 6.0 crore → 60%
Alternative = 1.5 + 1.5 = Rs 3.0 crore → 30%
Dual = Rs 1.0 crore → 10%
The FD and his own flat are not in the Rs 10 crore at all: the workbook treats bank deposits and residential property for living as savings, not traditional investments.
The test that sorts the rest is liquidity. Arvind can sell the large-caps, bond and ETF through the market today. The start-up shares and office unit have no ready market. The REIT units trade on an exchange, but the property underneath does not — which is exactly what "dual" means.
Why NISM asks about it
Chapter 1 (Overview of Alternative Investments) is built on this definition — traditional versus alternative, the avenues, the growth story and the role in portfolio management. Its first sample question is the definition itself (a financial asset that does not fall into one of the conventional categories), and its second asks for an example (purchase of commercial real estate). Chapter 2 describes how India's AIF regime grew to serve these assets, and Chapter 3 returns to low correlation with traditional assets as a diversification argument.
Common exam traps
- The definition is negative: anything outside stocks, bonds and cash. There is no uniform global classification.
- The essential characteristic is illiquidity, not complexity or high return.
- Exchange-traded futures and options used to manage portfolio risk are traditional in Table 1.1; complex structured products and OTC derivatives are alternative.
- An AIF is a vehicle, an alternative investment is an asset. Mutual funds and collective investment schemes are expressly excluded from being AIFs even when they hold unusual assets.
- Alternatives complement traditional investments — the goal is better risk-adjusted return over the long term, not replacement.
- REITs can be read two ways: the workbook says they are sometimes considered traditional assets or dual category because they are listed.
Check yourself
1.An alternative investment is defined as a ______ that does not fall into one of the conventional investment categories.
- a)mutual fund
- b)financial asset
- c)personal property
- d)financial planning
Show the answer
Answer: (b) financial asset
(This is a sample question from the NISM workbook.)
"AN ALTERNATIVE INVESTMENT IS A FINANCIAL ASSET THAT DOES NOT FALL INTO ONE OF THE CONVENTIONAL INVESTMENT CATEGORIES. CONVENTIONAL CATEGORIES INCLUDE STOCKS, BONDS, AND CASH."
Note what kind of definition this is — a negative one. "Globally, alternative investment industry EVOLVED OVER TIME, hence THERE IS NO UNIFORM CLASSIFICATION OR LIMITATION TO WHAT CONSTITUTES SUCH ASSETS. Alternative investments are therefore DEFINED GENERALLY BY SEVERAL SOURCES AS INVESTMENTS OTHER THAN TRADITIONAL INVESTMENTS." There is no positive test of what an alternative investment is, which is why the chapter spends its effort listing avenues instead.
Option (c) personal property is the instructive distractor. The chapter expressly sets aside "SAVINGS IN BANK DEPOSITS, GOVERNMENT SCHEMES, ORNAMENTAL GOLD AND RESIDENTIAL PROPERTY FOR LIVING PURPOSES" — none of which is even a traditional investment, let alone an alternative one.
Option (a) is doubly wrong: mutual fund units are named among traditional investments, and a mutual fund is expressly excluded from the AIF definition.
2.The SEBI (Alternative Investment Funds) Regulations, 2012 define an AIF as a ______ structure.
- a)financial
- b)NBFC
- c)corporate
- d)privately pooled
Show the answer
Answer: (d) privately pooled
(This is a sample question from the NISM workbook.)
"The SEBI (AIF) REGULATIONS 2012 DEFINE THE TERM ALTERNATIVE INVESTMENT FUND AS ONE WHICH IS PRIMARILY A PRIVATELY POOLED INVESTMENT VEHICLE."
Option (c) corporate is the trap worth understanding. An AIF may be constituted as a trust, company or LLP — the regulation is concerned with how the money is gathered, not with the legal vehicle chosen to hold it.
The full definition has three elements: privately pooled · funds from India or abroad · for a defined investment policy.
The "privately pooled" requirement is what justifies the lighter conduct regulation of AIFs relative to mutual funds. A mutual fund takes money from people who may not be able to assess what they are buying; an AIF takes money from those who can — and is correspondingly permitted strategies a mutual fund is not.
3.Which of the following is an example of an alternative investment?
- a)Investment in AAA listed bond
- b)Investment in Government securities
- c)Purchase of commercial real estate
- d)Investment in exchange traded futures
Show the answer
Answer: (c) Purchase of commercial real estate
(This is a sample question from the NISM workbook.)
Apply the chapter's own test — liquidity:
Why each of the other three is traditional:
- (a) "LISTED DEBT SECURITIES issued by both listed and unlisted companies" is a named traditional item
- (b) Government securities are on-market and readily saleable
- (d) ⚠️ "EXCHANGE TRADED SIMPLE DERIVATIVE INSTRUMENTS SUCH AS FUTURES & OPTIONS USED TO MANAGE PORTFOLIO RISK ON EQUITIES" appears explicitly in the traditional column
Option (d) catches people who assume derivatives must be exotic. Exchange traded futures and options are traditional; it is OTC derivatives and CDOs that sit in the alternative column, because they are complex structures without a ready market.
Commercial real estate qualifies because it is a direct, off-market holding — the alternative column includes "DIRECT INVESTMENTS IN REAL ESTATE AND INFRASTRUCTURE DEVELOPER PROJECT SPVs."
Contrast a REIT unit, which gives real estate exposure but is listed — and is therefore "sometimes considered either TRADITIONAL ASSETS OR IN THE DUAL CATEGORY."
Where this is taught
- Series XIX-B · Chapter 1: Overview of Alternative Investmentsintroduced here
- Series X-A · Chapter 13: Overview of Alternative Investment Funds (AIFs)introduced here
- Series XIX-A · Chapter 1: Overview of Alternative Investmentsintroduced here
- Series XIX-C · Chapter 2: Types of Investmentsintroduced here
Related terms
- Alternative Investment FundA privately pooled investment vehicle registered with SEBI that raises money from select Indian or foreign investors under a defined investment policy — never from the public at large.
- Hedge FundA pooled vehicle using diverse or complex trading strategies, long and short positions and fund-level leverage — in India, the AIF Regulations place hedge funds in Category III.
- Traditional investmentInvestment in financial securities — listed stocks and bonds, general mutual fund units and ETFs — whose shared feature is liquidity; distinct from savings such as bank deposits or ornamental gold.
- Dual CategoryStructures whose underlying assets are illiquid but whose instruments are liquid — listed or redeemable with restrictions — such as REIT and InvIT units and security receipts.
- Private EquityEquity capital raised by companies from external investors without going to the public markets — direct investment in businesses that are not listed on a stock exchange.
- Venture CapitalDirect investment in infant, early-stage businesses built on new products, services, technology, IP or business models — highly risky because such firms are small and prone to high mortality.
- Debt FundA Category II AIF that invests primarily in debt securities of listed or unlisted investee companies, or in securitised debt instruments, as per its stated objectives.