Traditional investment
Also written Traditional investments
Investment 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.
In plain language
Before the workbook can explain alternative investments, it must say what they are an alternative to. Its answer is traditional investments.
These are confined to financial securities. They include stocks and bonds from the primary and secondary capital market. They also include the general kinds of mutual fund units, and exchange traded funds. They serve general investors who want better returns than plain savings schemes give.
Two boundaries matter. On one side, traditional investments are different from savings. Savings means bank deposits, government schemes, gold jewellery (ornamental gold) and a home to live in. On the other side, they are different from alternative investments. Those need a bigger appetite for risk and are usually hard to sell (illiquid).
What ties traditional investments together is liquidity. You can get your money out through the market. Or, with an open-ended mutual fund, you can redeem your units at any time.
How it works
Table 1.1 — the traditional column
- Public equities — listed stock
- Listed debt securities issued by listed and unlisted companies
- Open-ended mutual funds with equity, debt or balanced exposure to listed debt, money market instruments and listed equity
- Exchange-traded simple derivative instruments such as futures and options, used to manage portfolio risk on equities
- Exchange traded funds
Why liquidity is the test. Footnote 3 of Chapter 1: traditional investments are primarily meant to provide high liquidity through the capital market trading mechanism, which is why listed shares and bonds, mutual fund units and ETFs fit so well. Alternative investments are the opposite — off-market, or complex with no ready market.
The borderline. Listed REIT and InvIT units are liquid instruments over illiquid assets. The workbook says REITs are sometimes considered traditional or dual category, and that InvITs, being listed and tradable, are akin to traditional assets.
How Category III AIFs relate to them. Chapter 3 notes that public equities are the most sought-after traditional asset class in India, delivering the highest risk-adjusted returns compared with fixed income, government bonds and fixed deposits — and that Category III AIFs themselves take dynamic positions in public equities. Chapter 2 warns that because Category III AIFs invest in traditional assets such as listed equities, an HNI must allocate carefully to avoid further concentration. Section 3.5 compares Category III AIFs with PMS, mutual funds and SIFs under the heading "Comparison between Category III AIF and Traditional Investments".
A worked example
Illustrative figures. Sunita Deshmukh, a Nagpur doctor, lists what she owns:
| Holding | Rs lakh | Workbook treatment |
|---|---|---|
| Fixed deposit with her bank | 50 | Savings — not a traditional investment |
| PPF account | 30 | Government scheme — savings |
| Gold jewellery | 25 | Ornamental gold — savings |
| Flat she lives in | 180 | Residential property for living — excluded |
| Listed shares | 80 | Traditional |
| Open-ended equity mutual fund | 40 | Traditional |
| Gold ETF | 20 | Traditional |
| Shares in a friend's unlisted clinic company | 15 | Alternative |
Traditional investments = 80 + 40 + 20 = Rs 140 lakh (Rs 1.4 crore)
Note the gold. Her jewellery is ornamental gold — savings. Her gold ETF is a listed security she can sell on any trading day — traditional. Same metal, different classification, because the test is the instrument and its liquidity.
If she needs Rs 1 crore in a week, the traditional bucket can supply it through the market. The unlisted clinic shares cannot.
Why NISM asks about it
Chapter 1 (Overview of Alternative Investments) opens with this definition and Table 1.1, and its first learning objective is the difference between traditional and alternative investments. Chapter 2 uses it in the HNI asset-allocation discussion, and Chapter 3 frames its comparison of Category III AIFs with PMS, mutual funds and SIFs as a comparison with traditional investments. Expect classification questions: which of these is a traditional investment, and why.
Common exam traps
- Savings are not traditional investments. Bank deposits, government schemes, ornamental gold and a house to live in are expressly distinguished.
- The common feature is liquidity — exit through the market or anytime redemption of an open-ended mutual fund.
- Simple exchange-traded futures and options used to manage portfolio risk are traditional; complex structured products and OTC derivatives are alternative.
- REITs and InvITs sit on the boundary — dual category, or akin to traditional because they are listed.
- The workbook is not consistent about gold and real estate. Chapter 1 excludes ornamental gold and residential property for living from traditional investments, but Chapter 3 (3.3.1.1) describes HNIs' interest in AIFs "apart from the traditional investments in real estate, gold and equities". For a definition question, use Chapter 1.
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.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."
3.What is the essential characteristic that distinguishes alternative investments from traditional ones?
- a)Higher expected returns
- b)Illiquidity — they are not readily convertible into cash
- c)Regulation by SEBI rather than RBI
- d)Investment only in unlisted companies
Show the answer
Answer: (b) Illiquidity — they are not readily convertible into cash
And the mirror image: traditional investments are "primarily ON-MARKET OPPORTUNITIES whose COMMON FEATURE IS LIQUIDITY, i.e. NEARNESS TO CASH, because they can be EXITED THROUGH THE MARKET OR BY ANYTIME REDEMPTION offered by an open ended mutual fund."
Option (a) is a consequence, not the defining characteristic. Alternatives do aim at "OPPORTUNITIES THAT CAN POTENTIALLY GENERATE HIGHER RETURNS" — but they "ENTAIL HIGHER RISK-TAKING AS WELL", and a higher expected return is neither guaranteed nor definitional.
Option (d) is too narrow. Alternatives include commodities, arts and antiques, vintage wines, film funds and hedge funds trading listed derivatives — none of which is an investment in an unlisted company.
The two reasons for illiquidity are separately examinable. An unlisted stake is illiquid because it is off-market — nobody quotes a price. A CDO is illiquid because it is complex — even a willing buyer could not readily value it.
And it is precisely this test that generates the DUAL category: "structures that have UNDERLYING ILLIQUID ASSETS BUT THE INSTRUMENTS PER SE MAY BE LIQUID." A REIT holds buildings but trades on an exchange.
Where this is taught
- Series XIX-B · Chapter 1: Overview of Alternative Investmentsintroduced here
- Series XIX-A · Chapter 1: Overview of Alternative Investmentsintroduced here
- Series XIX-C · Chapter 2: Types of Investmentsintroduced here
- Series X-A · Chapter 13: Overview of Alternative Investment Funds (AIFs)introduced here
Related terms
- Mutual fundA trust registered with SEBI that pools money from many investors and invests it in securities on their behalf — not a different product from shares and bonds, but a different way of owning them.
- Exchange Traded FundA mutual fund scheme whose units are listed and traded on a stock exchange like a share, so you transact at live prices through the day instead of at one end-of-day NAV.
- Portfolio Management ServicesA tailored investment service where the client owns the securities directly in their own name, regulated under the SEBI (Portfolio Managers) Regulations, with a minimum investment of Rs 50 lakh.
- Alternative InvestmentA financial asset outside the conventional categories of stocks, bonds and cash — defined by what it is not, and marked above all by illiquidity.
- LiquidityThe degree of ease with which you can turn an investment back into cash at a fair value — one of the three pillars of investing, alongside safety and return.
- 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.
- Financial assetsClaims on future cash flows such as shares, debentures, bank deposits, PPF and mutual fund units, as opposed to real or physical assets like gold, diamonds, infrastructure and real estate.
- Equity sharesOwnership in a company entitling holders to a share in profits and a vote on its affairs; equity holders are residual owners after all contractual claims, rewarded by dividend and capital appreciation.