I have been investing in MFs, listed stocks for more than 10 years. How about investing in unlisted shares, bonds?

I have been investing in mutual funds and listed stocks for more than 10 years. Recently, I came across alternative investment options like unlisted shares, bonds, and market-linked debentures. Should retail investors like me, who prefer to take risks and focus on the long term, consider these in their portfolio? If yes, what are the key things to keep in mind?

Advice by Vijay Kuppa, CEO of InCred Money

Given your high-risk appetite and a long-term horizon for your investments introducing alternative instruments like unlisted shares, corporate bonds, and market-linked debentures (MLDs) can certainly enhance your portfolio—if approached thoughtfully.

Unlisted shares are equity securities of a company that are not traded on a public stock exchange. These shares are typically traded privately, often over-the-counter (OTC) between specific individuals or institutions. Unlike publicly listed companies, unlisted companies are not subject to the same level of regulatory oversight and reporting requirements. 

Unlisted shares allow early entry into promising companies before they list, often at favorable valuations. You also bypass the lottery-like IPO allotment process. But they demand patience — liquidity is limited, and exits can take years (if the unlisted stock is not scheduled for an IPO). Similar to a listed company, analyse the company’s financials, leadership quality, industry position and valuations to take an informed decision.

A corporate bond fund is a type of mutual fund that primarily invests in corporate bonds, with at least 80% of its assets allocated to this asset class. Corporate bonds can offer a good risk-reward balance. Lower Credit Ratings often comes with higher yields (upto 12% XIRR) but so does higher risk. While defaults are rare, they can happen.

For someone with your risk profile, selectively adding AA to BBB rated bonds can boost returns. Just ensure you're comfortable with the issuer’s fundamentals and repayment capacity. You can find the information in the KID (Key Information Document) or you can visit the NSDL website for more information. 

Market-Linked Debentures (MLDs) are a unique investment option in the form of a bond, where the returns are directly tied to the performance of the market. These fixed income instruments are linked to an external benchmark, typically a stock market index, and are usually issued by private entities who have the flexibility to choose the benchmark.

MLDs differ from Non-Convertible Debentures (NCDs) primarily in terms of returns. While MLD returns fluctuate based on market conditions, NCD returns are fixed according to the coupon rate of the instrument.

MLDs combine fixed-income safety with market participation. They’re structured to pay returns based on market indices, often with capital protection. But MLDs can be complex—look closely at the payoff structure, underlying index, and exit conditions before investing. 

Even though you have a longer time frame for investment, it is always prudent to be diversified in different asset classes which have different risk-return features.

For eg. Corporate bonds are insulated from daily mark-to-market movements and help you see through medium-term volatility without a big drawdown.

Based on your risk profile and appetite, one can allocate 15-20% of one’s portfolio to alternative assets.