Evolving investment ecosystem for retail players

There has been an improvement in the investing infrastructure resulting in the elimination of information asymmetry
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Investing landscape has evolved over the years. Speed of execution, infrastructure, transparency and range of products have all improved. Although the last two years have been sluggish for the economy because of Covid-19, the post-pandemic recovery could result in the emergence of many novel products in the market.

From an investor’s perspective, basic rules of investing haven’t changed: investments linked to financial goals—short term, mid-term or long term—risk-return relationship, aligning goals to the asset classes and expectation of a return that beats the market inflation. But the landscape has completely transformed.  

Conventional products like stocks, gold, real estate, bonds, mutual funds, exchange-traded funds, commodities, derivatives, bank/post office deposits continue to be available, but now they compete with more agile, differently structured products.

The technology disruption resulted in the creation of fintech. With these tech platforms, transactions can be completed with a click of a button within seconds. Besides enhancing the transaction speed, fintech has reduced the cost involved, making these products lucrative to invest in and with denominations as low as Rs. 100. Crowdfunding and P2P lending are the emerging products in this segment. Equity crowdfunding is not legal in India, but crowdfunding is available for donations. P2P is safer, regulated via NBFCs, and retail investors can put money in these and earn handsome returns. The Indian market also offers Angel Network platforms where retail investors can come together and invest in the early stages of business through an angel investor. It is gaining popularity these days.

The financial crisis of 2008 in the US manifested distrust in the financial system. A few years later, blockchain emerged and offered cryptocurrencies (Bitcoin/Ethereum). It is a high-risk product. Due to the volatility involved, the majority of the middle-class population is wary of investing in it. Cryptocurrencies have a limitation because the Government of India is still debating about their legality. The lack of central control, which was its USP, has somewhat become a drawback in India. Once a concrete framework is ready, you may consider investing in it.  

In the real estate sector, instead of investing in residential or commercial property—a big-ticket item—Real Estate Investment Trusts (REITs) are available. This option can be used for a much smaller denomination, say twenty times smaller, with a similar return. It can generate a matching return. Since no physical possession is involved, it reduces asset maintenance costs post-possession.  

Technology has also facilitated liquidity enhancement for assets. Most of them can be possessed in digital form rather than physical. In the commodities metals, gold and silver have been replaced by gold/silver bonds. They offer appreciation without the hassle of holding them physically; there is no asset maintenance, and they are linked to the market rate. Gold bonds by the government also offer interest of 2-2.5 percent. Though gold’s appreciation is said to be linked to the rise in international oil prices, it has been observed that even when oil prices have dropped, gold prices have risen. Consequently, capital appreciation will also be good.  

This list is not exhaustive since new promising products emerge for the retail investors, but lack of information and resistance to change proves to be a deterrent. Fortunately, there has been an improvement in the investing infrastructure resulting in the elimination of information asymmetry. The regulatory environment is stringent for the investees making it investor-friendly. Investors can take benefit of this and pick up investment products that fit their plan. It is important to proceed with caution. After all, investment is one area where ‘one size fits all’ does not hold.

-By Dr Kirti Sharma, Professor, Associate Professor, Accounting & Finance