An overview of investment options for retails investors in India
For the past few years with the ease of capital market access through mutual funds in India. There is a new wave of retail investors along with the conventional equity traders, portfolio management services and big sized family offices. For this new wave of investor flow into the financial markets, the access to investments is technologically advanced and very easy to access.
After gaining significant experience in the American investment advisory industry, the major differences one can find between advanced and Indian investment markets are
- The cost of mutual fund investing
- The lack of ETF exposure and appetite
- The lack of personalised investment advice for all scales of investors
- The high appetite of investors to pick high returning investments than best suitable ones
The above-mentioned differences between a developing, growing Indian financial market and a developed, mature American financial market are significant for Indian investors and definitely worth discussing.
The cost of Mutual Fund investing in India is one of the highest in the world. The concept of having regular and direct funds itself shows the high cost in mutual fund investing.
An investor in the Indian investment landscape may not currently be hugely benefited by subscribing to low cost index investing like the American or European markets.
Active management of funds helps in creating wealth by beating the broader markets in a developing market like India.
The biggest advantage mutual funds provide to an average investor in India is the access to diverse investments to all scales of investment.
We can already save cost through direct funds but picking the right suitable funds is critical.
Though cost of investing is a very key factor, we believe that investing with professional advice in direct mutual funds is better than investing in regular mode through a distributor or a bank.
Actively picking the funds that are suitable to one will definitely outperform the fee you pay for a good adviser.
ETFs (Exchange-Traded Funds) are not widely popular investment vehicles in the Indian markets as they are relatively new and not well marketed.
The topic of ETFs vs Mutual Funds has been the epicentre of many Investment conferences globally for the past 5 to 6 years.
ETFs have real time execution which means they can be traded easily unlike MFs.
In an ETF, the fund manager does not have to think about making investment decisions considering inflows and outflows the fund experiences. Investment decisions are made on a portfolio level which reflects in every unit of the ETF.
This is a double-edged sword because the turn-over in the fund portfolio is more dependent on the units traded rather than the manager’s choice. For example, a mutual fund manager can choose not to invest all the deposits the fund experiences in a week if he feels that the market is overvalued unlike an ETF manager.
A good case study on how to translate the granular active management aspect of a mutual fund to an ETF is the way First Trust in USA has managed many of its ETFs where the frequency of portfolio review of an ETF was relatively high, mimicking the active management of a MF.
These types of ETFs are very optimal for retail investors.
An investment in any asset of any scale needs to be personalized and tailored. This is not widely available in the Indian markets for retail investors. Even if it is available, the definition of providing personalized investment advice is very subjective to the adviser or the investor.
We believe that the lack of awareness for an investor and the lack of interest for an adviser are two major reasons for this situation.
Lack of awareness for a retail investor about why personalized advice is the best approach for investing versus a one medicine for all problems approach.
Any advisory business is set up for earning profits and this personalized approach is not always profitable to the adviser.
Retail investors have to look out for advisers who are interested to provide personalized investment advice seeking for a fee rather than commissions from products. The main reason for this is loyalty. Any person is loyal to the source of their income and investors should prefer paying the advisor for advice rather than allowing them to earn commissions from investments like insurance agents or mutual fund distributors.
One big observation we have made in the current retail investor market is the lack of one question being asked, being thought about, and being answered.
The question is definitely NOT about which is the “best performing investment in the market”
The question has to be which is the “best suitable investment for me”
There is a scarcity of this question being asked and thought about by advisers or investors.
There are many platforms that enable investors to choose and invest direct mutual funds in a very convenient way. Many platforms also suggest which ones are the best performing funds and which ones are the best options according to them but NOT the best funds suitable for them.
Investing is a very personalized activity and requires tailored solutions at an affordable price.