Can Diversifying into Alternative Investments Help Investors Navigate Market Volatility? LGT Wealth's Viswanath Explains

In an Era of Volatility, Are Alternatives the New Safety Net?

As equity and bond markets continue to oscillate due to inflationary pressures, geopolitical instability, and interest rate uncertainty, many investors are questioning the effectiveness of traditional portfolios. Against this backdrop, Anil Viswanath, Senior Portfolio Manager at LGT Wealth India, suggests that diversifying into alternative investments might not just be prudent—but essential.

“Alternative investments have evolved from being niche to becoming a core part of institutional and increasingly individual portfolios,” Viswanath stated in a recent conversation. “They offer uncorrelated returns, inflation hedges, and risk-adjusted performance which can be vital when markets become turbulent.”

Understanding the Appeal of Alternatives

Alternative investments broadly include private equity, real estate, infrastructure, hedge funds, commodities, and even collectibles or digital assets. Unlike stocks or bonds, these instruments are often less liquid but can provide higher returns or portfolio stability in times of macroeconomic stress.

“Traditional portfolios—typically a 60:40 mix of equities and bonds—were challenged in 2022 when both asset classes declined simultaneously,” Viswanath explained. “This was a wake-up call that diversification within asset classes is no longer sufficient.”

For instance, private credit and real estate investment trusts (REITs) have gained traction due to their yield-generating nature. Infrastructure investments, especially in renewable energy and logistics, are also emerging as stable long-term plays amid global decarbonization goals.

Why Market Conditions Favor Alternatives

Over the past few years, markets have been marked by sharp corrections and rallies, driven by rate hikes, geopolitical tensions like the Russia-Ukraine war, and China's economic slowdown. The resulting volatility index (VIX) spikes have forced investors to rethink portfolio construction.

Viswanath noted that alternative assets tend to show lower correlation with public markets. “During equity downturns, hedge funds using market-neutral or macro strategies often outperform. Similarly, real assets like farmland or timberland serve as natural hedges against inflation.”

Furthermore, with central banks globally moving towards a more cautious rate stance, alternatives like private equity and venture capital may find renewed interest, especially from high-net-worth individuals and family offices looking for long-term alpha.

Risks and Challenges to Consider

Despite their potential, alternative investments are not without risk. They are typically less transparent, involve longer lock-in periods, and may have higher fees.

“Liquidity is the biggest constraint,” Viswanath cautioned. “Retail investors need to assess their time horizon and risk appetite before committing. Also, due diligence is critical—access to top-tier managers is limited, and performance can vary widely.”

In India, regulatory developments have made alternatives more accessible. Instruments such as Alternative Investment Funds (AIFs) and Infrastructure Investment Trusts (InvITs) have seen rising interest, but investor education remains key.

Institutional Interest on the Rise

Globally, large institutions have already led the way. According to a Preqin report, pension funds and endowments now allocate 20-30% of their portfolios to alternatives, up from 10% a decade ago. The Yale Endowment Model, credited with popularizing this approach, has demonstrated consistent outperformance over decades.

“India is catching up,” Viswanath observed. “We’re seeing family offices and ultra-high-net-worth individuals diversifying aggressively—some even deploying capital into global private equity or real estate.”

He also highlighted the democratization of access through fintech platforms and structured products, which allow smaller investors to participate in curated opportunities once reserved for institutions.

Analyst Perspective

Market experts echo Viswanath's views. Sanjay Mehta, founder of 100X.VC, said, “Alternative investments not only offer diversification but also expose investors to emerging themes like deep tech, climate innovation, and AI.”

Priya Nair, Head of Research at a Mumbai-based wealth advisory firm, added, “Amid persistent volatility, it’s prudent to build a satellite portfolio around your core holdings, allocating at least 10-15% to alternatives.”

However, both Mehta and Nair agree that overexposure can be counterproductive. A balanced approach, guided by financial goals, is imperative.

Outlook for Indian Investors

India’s alternative investment space is still maturing, but momentum is clearly building. According to SEBI, AIFs in India saw assets under management (AUM) cross ₹10 lakh crore in FY2025, with notable inflows from Tier-1 and Tier-2 cities.

With India poised to remain one of the fastest-growing major economies and its capital markets evolving rapidly, the role of alternatives could become more pronounced.

Viswanath summed it up: “Alternatives won’t replace equities or bonds but will complement them. In a world where certainty is a luxury, portfolio resilience comes from thoughtful diversification.”

Investor Takeaway

For long-term investors, alternative investments represent a powerful tool to reduce volatility, generate yield, and capture new growth frontiers. While they require careful consideration, regulatory awareness, and professional guidance, their inclusion in a modern portfolio is becoming less of a luxury and more of a necessity.

As markets remain on edge, those embracing a diversified strategy with a touch of alternatives may find themselves better positioned—not just to weather the storm, but to thrive through it.