Home / Opinion / Columns /  Innovative, cost effective products transform Indian investment landscape

Just like a steed picks up pace close to the finishing line, the Nifty seems to be racing ahead with a fresh burst of energy, notching record highs at breakneck speed. Ever since the advent of #WFH in March 2020, we’ve seen heightened interest in trading activity and investments in direct equity, giving rise to a new breed of Robinhood investors. Over 2.4 million new demat accounts were opened in the first quarter of FY21, which is close to a 10% rise in the number of account holders. Whether this trend continues in the post-covid era remains to be seen; however, the investment landscape is seeing the emergence of a few megatrends that could have a significant impact on allocations in financial portfolios.

Passive investing

While the global assets under management (AUM) in passive funds is over $5 trillion, passive investing in India is in its nascent stages. A passive fund tracks a market index or a specific market segment or sector. Unlike with an active fund, the fund manager does not decide which securities to invest in; rather, the fund simply mirrors the index such as the Nifty, the Sensex, or the IT index. This makes a passive fund far cheaper in terms of expense ratios.

In India, passive investments have seen their AUMs grow exponentially from $2 billion five years ago to around $24 billion now. This is primarily spread across exchange traded funds (ETFs) and index funds. With index funds continuing to outperform actively managed funds in the past 3 years, retail participation in passive investments is likely to see a huge uptick in the future.

Passive mutual funds gain currency
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Passive mutual funds gain currency

International diversification

A strong case has built up in support of international diversification over the last few years. Indian investors increasingly want to participate in the growth opportunity presented by global tech firms like Facebook, Amazon, Apple, Netflix and Google (FAANG stocks) and others such as Tesla, Walmart, etc. This trend has seen increased momentum in the last few months, with several brokerages offering investors the facility to invest directly in US stocks and ETFs. These brokerages are tied up with a US-based intermediary and the transaction is facilitated through the LRS route (liberalized remittance scheme), which permits an Indian citizen to utilize up to $250,000 every year for investments, business purposes, tourism, etc. Since there is no minimum ticket size and fractional shares can also be bought, there is heightened activity in a segment that was erstwhile the domain of the ultra-rich.

Investors who want to keep it simple can avail of similar benefits by going through mutual funds. Apart from exceptionally high returns, the ease of investing, lower transaction costs and facility for SIPs have seen AUMs of funds with international stocks swell over the last year.

A family that is planning for the international education of children should ideally make some allocation to foreign equity in their portfolio as it offers a hedge against the long-term depreciation of the rupee. As the old adage goes, “Don’t put all your eggs in one basket"; hence, investing around 10-15% of your overall equity portfolio in foreign stocks offers an investor the advantages of better diversification, lesser volatility due to lower correlation, and potentially higher returns.

Socially responsible investing

Socially responsible investing (SRI), also known as “green" or ethical investing, is an investment strategy that seeks to combine both financial return and social/environmental good. It enables investors to align their personal values with their investment objectives so that they can avoid businesses that negatively affect the environment and people such as tobacco and gambling.

The recent launch of ESG schemes by noted asset management companies (AMC) is proof of the increasing awareness and popularity of investors keen to participate in ethical investing. Their decision is substantiated by growing data and evidence, which suggest that companies which respond positively to environment concerns, protect their work force and foster innovation and exhibit high standards of corporate stewardship ultimately report excellent financial performance.

Traditionally, philanthropy has been the primary source of funding social investments in India. However, with a younger generation that is more socially engaged, we see the emergence of a large set of investors moving to a mindset that not only considers risk and reward, but also social impact as equally important in making financial decisions.

These are but a few of the prominent trends that are shaping the Indian investment landscape. As the trend of financialization of savings accelerates, we look forward to more innovative, cost effective products and diverse investment vehicles for our investors.

Dhiraj Relli is managing director and chief executive officer of HDFC Securities Ltd.

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