Thanks to technology and globalization, the variety of investment options available to retail investors has exploded. You can now invest in US-listed stocks, buy into fractional ownership of assets, and much more. Retail investing is evolving rapidly and is now deeply intertwined with global events and influences.
Newer asset classes and investment avenues are emerging, regulators are getting savvy too.
This fast pace requires retail investors to keep abreast with changing regulations, sectoral developments, and emerging trends. Here are 4 such curated trends and developments.
1) Climate & Sustainability Investments
Alarming climate change data, consumer consciousness, and a combination of pressure + incentives from regulators have led to private and public investments in the growing and very important sector, broadly categorized as ESG investing.
AUM for sustainable investments grew 4.7times over last year in India given the increased demand for climate action and overall sustainable investing given the impact of Covid19. Compared to global AUM, we still have much to do.
Some notable sub-sectors include electric vehicles (EVs) and carbon credits generation businesses. While the move towards EVs seems like an established trend, the surge in demand for carbon credits or carbon offsets has led to a variety of investor types investing in carbon offset generation projects and companies.
2) Fixed-Income Fixation
With volatility in the equity markets and tumultuous world events, interest in fixed-income investments has shot up with many tech-enabled options emerging for retail investors.
You can now invest in portfolios of diverse, fractionalized loans with IndiaP2P earning up to 18% p.a., invest in bonds starting at INR 20,000 investments and even explore crypto-based fixed-income products that make returns by lending your money/crypto to projects seeking credit.
3) New Developments in Mutual Funds
India has over 2000 mutual fund schemes for just about as many listed companies. This makes choosing between schemes and funds a very difficult task.
The Association of Mutual Funds in India AMFI has made it easier for retail investors to choose between and understand a mutual fund’s performance.
Basis directives from SEBI, AMFI has specified indices against which the performance of various mutual funds should be compared. This is to make it easier for retail investors to evaluate how their investments are performing and choose which funds to invest in.
The performance of a mutual fund is usually measured via two metrics called alpha and beta.
Let’s start with alpha: Alpha measures how well or badly the fund did in comparison with an index. Remember that mutual funds are thematic – can be a sector, size of companies etc. To estimate alpha we need to know the closest index, let’s say for a fund that invests in large companies, BSE100 index may be appropriate.
What fund managers aim to achieve is a positive alpha i.e.deliver greater returns than the index however, negative alphas are also a reality. AMFI in its guidelines has very nicely defined these comparison indices which can be viewed here.
On the other hand, beta is about volatility i.e. the ups and downs in prices and hence your earnings. If your mutual fund is more volatile than the comparative index it has a high beta (>1) and low beta (<1) if it is less volatile than the market.
It is preferred that a fund have a high beta when the markets are generally trending up and a low beta when they are in a decline. This adjustment is dependent on the fund managers’ skills.
4) Action on unregulated investment products
SEBI and RBI have been advising retail investors to be cautious of unregulated investment products such as digital gold and crypto with the latter and its use cases coming under an increasing number of taxes and high tax rates.
P.S. The recent RBI repo rate hike i.e. putting in motion an increase in interest rates will unequally affect different asset classes.
Stocks & Equity MFs
Stocks of companies that are highly leveraged i.e. take on loans frequently such as a large proportion of small-cap stocks and small-cap mutual funds are likely to be affected more as interest payouts are set to increase and the supply of loans will decline as well.
Fixed-Income and Debt Mutual Funds
For P2P lending investors, this may mean potentially higher yields.
For debt mutual funds, an increase in interest rates is usually bad news as rising interest rates mean that the prices of bonds (in which debt MFs invest) fall as investors prefer to wait for new bond issuances that will give higher yield. This is more relevant for longer-term debt investments, however, the impact on shorter tenure investments should be less.
(By Neha Juneja, CEO and Co-founder, IndiaP2P)
Disclaimer: This is the author’s personal opinion. Readers are advised to consult their financial planner before making any investment.