ComparisonsInvestment

High Risk High Reward Investments: How To Do Them Right

High Risk High Return Investments

Having a balanced investment portfolio is vital to an individual’s investment strategy. So most portfolios should consist of the bread-and-butter of investing: stocks, property, funds etc.

But most portfolios should also have a little bit of exposure to high-risk, high-reward investments too. These types of investments add diversification to your portfolio as well as give exposure to high growth investments.

High-risk high-return investments are also often referred to as “alternative investments” or “growth investments” or “high yield investments”.

Of course, these investments should be done in moderation and with care. But if you are careful and build a diversified portfolio, alternative investments like this can prove lucrative.

We go into the types of investments we’re talking about, where to find them, and what to watch out for.

An executive summary of this article

  1. Though high risk, high return investments are risky, they are rewarding and should typically make up only a small part of your portfolio (10-30%).
  2. Usually, they are only suitable for high net worth individuals and sophisticated investors.
  3. If you have a reasonable amount of savings (above £50k), you should definitely consider investing a little of your port into alternative investments.
  4. There are dangers of diving into asset classes you do not understand.
  5. Always be wary of who you trust your money with to invest on your behalf.
  6. Within the portion of your portfolio set aside for alternativ investments, make sure you diversify across various alternative asset investments too, to further spread the risk.
  7. Understand the tax implications of alternative investing. There are som very beneficial tax benefits available in particular for startup investing.
  8. Muslim-founded startups require venture capital, and investing in them via vc can prove to be a rewarding and highly impactful part of your portfolio.
  9. Alternatively, SME financing via Qardus is also a high impact alternative investment that provides a fixed-yield return.
  10. For property development investing, Godwin Capital, Top Yielders, and IntroCrowd are great options.

What are high-risk, high-return investments?

High-risk investments have the potential to lose a large chunk of your principal investment (or all).

You can actually get really high risk Investments such as forex and contingent capital strategies where you may lead to losing more money than your principal investment. These are typically haram investments though.

Defining what constitutes a high-return investment is subjective of course. In general though, anything 10 percent or above is a high return relative to other investments out there.

What kind of alternative assets are we talking about here?

Assets in this category have two primary features:

  • Illiquid – you cannot easily convert your investments into cash quickly or immediately. You are typically looking at a hold period of between 2-8 years.
  • Investments have the potential to do 10x returns, but also the potential to return nothing.

Typically, these investments include:

  1. Startup investing;
  2. SME business finance; and
  3. Property development-based projects.

What percentage of my portfolio should it be?

High-risk assets should only take up a minority of your investment portfolio. Although it is hard to give a precise number, we would recommend that it is somewhere between 10-30% depending on your appetite and how much savings you have available.

Of course, as you become a sophisticated investor and build up years of experience, you can vary that percentage as you like.

Notably, with such investments, there may be a tendency to get excited and over-invest. Even if, in the context of startup investing, the startup is dynamic, with a massive upside, stimulating and led by an enthusiastic CEO, do not let that cloud your judgment.

Investors should be disciplined and not over-invest. You should work out how much you can invest per alternative investment opportunity and then stick to that for each opportunity.

Who are these alternative assets right for?

While, it is possible in theory for anyone to invest in these asset classes, typically they have a relatively high buy-in point and due to regulatory reasons they are restricted to people who have a high-net-worth or are sophisticated investors. And no that isn’t just an ego-boosting title. According to the FCA, sophisticated investors should tick one of the following:

  1. Are members of a syndicate or business angel network
  2. Have multiple investments in unlisted companies
  3. Worked in the private equity sector for at least two years
  4. Are the director of a company with an annual turnover of at least £1 million.

If you have been part of the IFG.VC angel syndicate for a few months then you would qualify for (1), or if you are a business owner with shares in various private limited companies, you would quality for (2).

High net worth individuals should have over 100k annual income and at least 250k in assets (e.g. property, cash and other investments). Assets should not include one’s primary residence or one’s pension.

To give you an idea of what to expect from a startup perspective, at IFG we have a minimum figure of 2.5k for investments. Given that you would aim to approximately invest in 10-20 companies over five years, and that it makes up around 20 percent of your portfolio, your overall investment pot should be valued at around 125k, or you should expect to grow it to that amount over the next 5 years.

Alternatively, if you are young and have little to no responsibilities but want to go for high-risk investments, it may be possible to consider some of these investments early on.

Yet, with that said, you should exercise due diligence and be in a position where money lost wouldn’t drastically impact your finances.

General tips for investing

1.      If you have a decent amount of savings, seriously consider investing

Usually, people with savings let inflation eat away at their savings or invest it in a low-risk low reward investment like al-Rayaan’s savings account options. The problem with this approach is that such investors will leav a lot of potential growth and gain on the table.

There is nothing wrong with having some of your savings in cash or in a savings account – but if all of your portfolio is in cash or savings accounts and you are targeting a higher rate of return – clearly something will need to be tweaked with your investment portfolio.

If you are young, consider investing early on. As you earn more money or create new streams of income, you can slowly grow your portfolio. Within 20-30 years, your portfolio could grow significantly in value.

2.      Do not dive into asset classes that you do not understand

At IFG, we have heard from a wide range of people about the perils of their investment journeys. Investing in an area where your due diligence levels are not high can be disastrous. Though this seems intuitive, it is wise to learn about the asset class properly before diving into it.

For example, IFG recommends those interested in startup investing to watch some of our startup webinars (available for syndicate members) and start investing small.

You can better understand the different asset classes by visiting the providers’ education portals, exposing yourself to various markets and networking with successful individuals within those sectors.

Whether it be through a family function or corporate dinner, networking and learning from people who understand those investments can be a fast way to gain a solid understanding of new asset classes.

3.      Be wary of who you trust your money with

We all know someone who has given their savings to a relative with a newfound ‘expertise’ in forex trading or another high risk high-return investment but have unfortunately lost all their money within a few days.

So what went wrong here?

The investors have fallen into the mistake of trusting the wrong people.

To avoid this, you can invest your funds with reputable individuals or funds.

How do you work out who to trust? Typically they will be companies who are featured on neutral third party comparison platforms such as our halal investment platform. They will be regulated where they need to be regulated, their founders will have track record and experience in that particular asset class, and other users will give positive feedback on them on review websites like Trustpilot.

Examples of high-risk, high-reward investments

1.      Startups

Startups are different from small businesses in terms of scalability. Small businesses will typically reach a maximum level of profitability and stop there. It is extremely rare for a local business to open new branches and expand. On the other hand, startups are exciting, impactful, and technical. They have the potential to reach massive heights – but also completely fail.

It is for this reason that startup investing can yield over 20% annual returns (according to detailed research conducted by the National Endowment for Science Technology and Arts). In some rare cases, you can potentially far exceed such annual returns too. For example, if you hit a unicorn startup (like the next Facebook) then clearly you’ll be making a lot more than 20% annually.

An added benefit to startup investing is the UK government tax breaks. For SEIS/EIS registered investments, the UK taxpayer can claim back up to 50% of their invested amount which naturally de-risks your investment by 50%. So, if you invest £10,000 into a SEIS registered startup, you can claim back £5000 from your taxes paid that year.

The tax breaks also cover you for around 20-30% more in case the startup collapses within its first 3 years. So, your total at-risk capital is significantly reduced from £10k to approximately £2-3k.

That being said, investors should always be cautious; most startups fail and only a handful will succeed. With that in mind, the way to do startup investing successfully is to diversity across a range of startup investments.

You can find out more about startup investing here.

Why should Muslims invest in startups?

The stats are bleak when it comes to Muslims and business.

Out of the top 200 companies in the world, only two are from Muslim majority countries, ARAMCO and SABIC, both of which are natural resource manufacturers.

The reason why this is disappointing is that Muslims constitute 25% of the world’s population and yet only have 1% representation in the top companies. And these companies have immense clout that rivals many countries.

Early capital can transform industries and startups, but Muslim startups are simply not getting venture capital funding. IFG has conducted a detailed proprietary analysis examining 953 recent deals involving 2023 founders by the top 20 venture capital funds.

We found that minorities are underrepresented in the VC community, particularly Muslims who are 67% underrepresented in the startup world.

Of the top 20 venture capital firms surveyed in the UK, only 3% of financed startups have a Muslim founder. Increased venture funding could significantly move the economic needle for the Muslim community, but also the economy as a whole: 46% of Muslims live in the 10% poorest constituencies in the UK.

2.      SME financing: Qardus

Another type of high-risk, high-reward investment is SME financing. Qardus is a shariah-compliant lender to small and medium-sized enterprises with cashflow needs – they essentially provide businesses halal short term loans. As the investor, you will earn money as the recipient business pays the money back.

The investment is structured via a commodity Murabaha structure and is approved by most leading scholars. Even though this is not the most preferred shariah mode for financing, Qardus have stated that they plan to see if other structures can be offered and we are comfortable with their approach as it stands.

Although it is a fixed-return investment, with investors able to obtain 8-12% returns over a 1-2-year period, they are still susceptible to losing a large chunk of money too. Qardus do detailed credit checks of course, but there is always a risk that a business may delay or default on some of its payments. Again, the way to mitigate this risk is to build up a basket of such investments.

3.      Property development investments

Property development investments are great because they provide the opportunity to make money at various stages of development. Whether it’s before or after planning permission is granted or before the building is rented out or sold, there are significant returns to be made.

Property development investments at a bigger level require deep expertise, networks in the property industry and experience. In this regard, Godwin, Yielders and Introcrowd are great options. You can compare them on our halal investment platform.

Godwin Capital

Godwin Capital utilises its team of experts to deliver high standard projects including homes, commercial spaces, and local community facilities. They offer fixed returns of between 8 and 11% annual return. Godwin is a relatively rare fixed-return product structured in a sharia-compliant way (with full mufti certification) with a reputable mainstream developer.

It is an illiquid investment however as the product requires money to be locked in for over two years. There is also the risk of Godwin projects failing or being delayed, and as a result the offered returns are not met or worse you lose some or all of your initial capital.

Top Yielders

Yielders allows investors to invest in high-yield property and commercial developments. They source off-market deals before the wider market is aware of the opportunity and have further due diligence carried out before deciding to go ahead.

Once confirmed, they create an SPV (special purpose vehicle) to buy the property and then offer it to the crowd. This means that when you invest in a Yielders deal you’re comfortable that the deal is secured and won’t fall away if the investment amount isn’t hit.

If you would like to sell before the scheduled sale of the property, you can contact Yielders who will offer your stake on their platform. There is no guarantee that someone will buy your portion, but historically each offer has been taken up.

Top Yielders is open to more affluent investors and gives exposure to higher risk higher reward development projects. Projects are usually 12-18 months and there is a £50,000 minimum investment, with a projected 15% annualised return.

There are exit, management, and setup fees so do have a look at our in-depth review of Yielders before deciding to invest.

IntroCrowd

Introcrowd is an investment into land developments – a different genre of property investment to property rental or redevelopment. It is a nice complement to other asset classes.

Introcrowd is led by an experienced team with backgrounds in land acquisition and planning permission. The minimum investment amount into a project is £5,000, and after that, you can buy anything in £500 increments. There is a 2% set up fee and 5% exit fee.

As for returns, it depends on the project, but 50-100% returns on investment over a 5-year term are not unusual. Introcrowd provide a report from the outset which helps.

Again, to reiterate, projects can run slower than expected, planning permission may unexpectedly not be granted etc. so, while the land gives at least some security to investors, there is a risk of loss of some of the investment.

Conclusions

In sum, high-risk, high-reward investments are an interesting complement to many investment portfolios. They do have a slightly higher buy-in than most, but those who qualify should seriously consider them and look to build a diversified basket of these types of assets alongside more mainstream and less volatile investments.

References

https://www.financial-expert.co.uk/what-is-a-sophisticated-investor/

https://www.syndicateroom.com/learn/glossary/high-net-worth-individual-hnwi#:~:text=In%20the%20United%20Kingdom%2C%20a,%C2%A3100%2C000%20or%20more%3B%20or

https://www.islamicfinanceguru.com/entrepreneurship/ifg-report-muslims-are-not-getting-vc-funding-this-is-bad-for-our-economy/

https://www.islamicfinanceguru.com/halal-investments/

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