8 Best Mutual Fund Alternatives

Mutual funds have for many years attracted investors because of diversification, professional management, and the chance to earn high returns.

However, savvy investors are always looking for alternative options to diversify their wealth. Whether you want to hedge your money against market volatility, gain exposure to unique asset classes, or simply explore new investment opportunities, understanding the alternatives to mutual funds can open up a world of possibilities.

In this blog, we will check out different investment options that can complement or even replace mutual funds in your portfolio. From real estate and peer-to-peer lending to commodities and cryptocurrencies, discover the exciting alternatives that can enhance your financial strategy.

List of Mutual Fund Alternatives

1. Exchange-Traded Funds (ETFs)

Exchange-traded funds (ETFs) are one of the best mutual fund alternatives. ETFs are similar to mutual funds that offer diversification by holding a basket of securities. However, ETFs are not listed on stock exchanges, giving investors greater liquidity.

Also, the shares of ETFs can be bought and sold at current market rates, which is not true in the case of mutual funds.

ETFs  have lower expense ratios compared to mutual funds, making them cost-effective. With a wide range of ETFs available, investors can tailor their portfolios to match their investment goals.

2. Individual Stocks

If you want a better investment option than mutual funds, stocks are without any doubt a good option. Investing directly in stocks allows  investors to handpick companies they predict will outperform the market. This approach provides them with greater control over the investment portfolio.  

However, investing in the stock market requires years of experience. Also, it’s highly risky, because it is volatile. The important thing you can do is diversify across  various sectors and mitigate some of the risk, but one should be always prepared for potential fluctuations in their investment value.

Want to start trading? Check out this blog and find the best trading apps so that you can trade easily. 10 Best Stock Market Apps in India

3. Bonds and Fixed Income Securities

Bonds and fixed-income securities are safe investment options that give you steady returns. If you want to play safe instead of going after high returns. You get to earn regular interest payments. Your principal amount is returned after the maturity. Some of the general choices that can provide stability include government bonds, corporate bonds, and municipal bonds.

For investors looking for a better alternative investment than mutual funds, bonds can offer a stable income and lower volatility. However, they provide lower returns compared to equities. Including a mix of bonds and other fixed-income securities would be can help balance the risk-reward profile of a diversified portfolio.

List of bonds in which you can invest your money. List of the Highly Safe Bonds

4. Gold

Investors have described gold as a real inflation hedge, a liquid commodity and a safe-haven investment. Therefore, it is traditionally in high demand and can be a tough contender to mutual funds and other similar investment instruments.

A very important feature of gold is its non-correlation with other types of investments, especially equities, therefore a perfect hedge. 

In this context, there are different ways to invest in gold, this include buying physically by owning gold in the form of coins or bars, and if you want to buy it digitally, then you have gold ETFs, sovereign gold bonds, or you can invest in gold related stocks or futures and options that are linked to gold mining companies.

Small investors use direct methods of investment. This means acquiring physical gold in the shape of gold bars, gold coins, or any other physical gold. Financial experts advise investing in gold up to 5-10% of an individual’s investment.

Wondering how to invest in gold? Check out this blog How To Invest In Digital Gold

5. Real Estate Investments

Real estate investments are a good alternative to mutual funds because of their possibilities of capital gains as well as rental income. An investment in real estate ranges from direct buying of residential or commercial property to putting one’s wealth into real estate investment trusts. In the case of REITs, investors can buy shares in real estate portfolios.

Real estate is bound to be more profitable than mutual funds for people who intend to invest in property of high value. However, it is pretty capital-intensive with high risks attached to market conditions, property management, and maintenance-related hassles. Risks can be minimized by adopting diversification in real estate investments across different property types and geographical locations.

6. Peer-to-Peer (P2P) Lending

The rising penetration of non-banking financial companies (NBFCs) in India has resulted in a lending revolution. Investors can bypass banks and complete their financial needs using NBFC products. The new age of lending, a prominent alternative investment, is peer-to-peer (P2P) lending. You can directly lend your money bypassing the banking system. 

P2P lending directly connects individual lenders with borrowers, avoiding traditional channels of financial institutions. You can earn up to 12% returns per annum, which is higher than traditional investments.

You can lend your money through various P2P platforms. One such popular platform is LenDenClub.

LenDenClub is India’s largest P2P Lending platform with more than 1.5 crore registered users. LenDenClub provides three options for lending your money: Lumpsum plans, Monthly Income Plans, and Manual Lending.

This makes P2P lending one of the ideal mutual fund alternatives for people who are in search of steady returns. However, P2P lending involves a credit risk because a borrower might default on the loan issued to him. You can handle this type of risk by diversifying your wealth across multiple borrowers. Additionally, carefully evaluate the creditworthiness of each borrower.

However, despite the risks involved in P2P lending, it still has the potential to provide a steady stream of returns, immune from market volatility.

7. Commodities

Commodities like silver, oil, and agricultural products are also one of the mutual fund alternatives. Some ways commodities can be invested in are through direct purchases, futures contracts, or ETFs focused on commodities. With the low correlation between commodities and other traditional classes, they provide a wonderful tool for diversifying a portfolio.

One can consider commodity investment as protection against bad times when economic cycles are on the downside. However, commodity prices are volatile because of a variety of factors, including supply and demand dynamics, geopolitical events, and many other events. Being able to understand all of these drivers, and making insightful judgments, lies at the root of successful commodity investing.

8. Cryptocurrencies 

Cryptocurrencies, such as Bitcoin, Ethereum, have emerged as a good alternative to mutual fund investments. They operate on decentralized blockchain technology. They offer unique advantages that make them an attractive option for investors seeking diversification and very high returns.

One of the primary thing about cryptocurrencies is their potential for high returns. Unlike mutual funds, which are often tied to the performance of the stock market and other traditional financial instruments, cryptocurrencies can give you crazy high returns in relatively short periods. 

Moreover, cryptocurrencies provide a level of autonomy that is not available with mutual funds. Investors can manage their holdings without relying on fund managers, allowing for more personal involvement.

Additionally, the decentralized nature of cryptocurrencies means they are not subject to the same economic conditions that impact traditional investments. This can offer a hedge against inflation and currency devaluation. 

Remember, it’s important to note that cryptocurrencies come with their own set of risks. They are highly volatile and there is regulatory uncertainty. Therefore, one must thoroughly research and understand the market, invest responsibly, and consider their risk tolerance before diving into this alternative asset class.

Factors to Consider

1. Risk Tolerance

Different mutual fund options come with varying levels of risk. For example, stocks and hedge funds can offer exceedingly high returns. Simultaneously, they can be pretty volatile, and a large chunk of the investment may be lost. In direct contrast, bonds and other fixed-income instruments offer stability but usually have lower yields. An individual should know his/her risk tolerance to be able to pick an appropriate investment option.

2. Investment Horizon

Your investment horizon, or the amount of time you intend to hold an investment, should influence your choice of mutual fund alternatives. Investments with long-term exposure, such as real estate and some commodities, can ride out fluctuations in the market and really return much over time. On the other hand, short-term investments, like bonds and ETFs, entail easier liquidity and might be suitable for those with very immediate financial goals.

3. Diversification

Risk can only be managed and returns maximized through diversification. Broad diversification of investments across asset classes, sectors, and geographies dilutes the effect that poor performance from any one investment may have on an overall portfolio. Among other mutual fund alternatives for diversification are ETFs, bonds, real estate, and commodities.

Conclusion

Mutual fund alternatives can offer newer channels of diversification and expected returns. Be it ETFs and individual stocks, real estate, or P2P lending, each of these options comes with distinct advantages and problems. Understanding your risk tolerance, investment horizon, and the need to diversify can help you create a resilient, dynamic investment portfolio that adapts with changing market conditions toward your goals.