2021 was the year the Indian retail investor came of age. While institutional money is seen as the ‘smart’ money, the year gone by belonged to retail investors. Retail investors have traditionally been a smaller subsection of the fraternity, especially in comparison to foreign and domestic institutions. But since the onset of the pandemic, their numbers have spiked sharply, aiding in driving prices of stocks to record highs. The National Stock Exchange (NSE) of India reported that the share of individual investors on the NSE (by turnover) rose from 33 percent in the 2016 fiscal year to 45 percent in fiscal 2021. At the end of November 2021, individual demat accounts touched approximately 77 million.
In the last two years, all asset classes excluding cash have witnessed a tremendous rise along with an explosion of new investment instruments and exposures. In terms of investing trends in 2021, passive funds (index funds and ETFs) gained traction on both folio counts and inflows and assets under management (AUM). As transaction costs tended to move towards zero, the user interface and user experience offered by individual trading and investing platforms attained utmost importance, a crucial reason behind the sharp spike in the number of retail investors.
Moving away from traditional investment options such as equities, debt, real estate and gold, digitally native retail investors gained tremendous interest in asset classes such as peer-to-peer lending, REITs (Real Estate Investment Trusts), cryptocurrencies in 2021. Based on inferences observed from investment behaviour, passive fund flows will gain further momentum in 2022 with new investors building their portfolios with index funds and ETFs. In the Indian mutual fund (MF) industry, passive schemes have slowly been gaining prominence as investors are increasingly investing in this category for diversification. In the past one year, there has been increased participation in low-cost passive funds. To answer what they are, passive funds happen to be funds that duplicate a particular index or a benchmark. Index funds or exchange-traded funds (ETF) are the best known examples of passive funds. The numbers speak for themselves: the $100 Trillion Machine report by Boston Consulting Group detailed that the AUM of passive funds under the global asset mix of mutual funds was pegged at $22 trillion in 2020, and is expected to rise to $34 trillion in 2025. The data from the Association of Mutual Funds in India (AMFI) shows that net assets under management of passive schemes stood at Rs 4.72 trillion in December 2021, compared to Rs 2.94 trillion in December 2020 – an increase of 60.5 percent.
Since the pandemic and increasingly over the last couple years, we have also seen more people talking about personal finance and investing openly on social media and other open forums. Earlier a topic not discussed much, it has come to see wide-scale traction with content creators and communities taking the centre stage, democratising investing and making information more accessible. The future of investing lies in it becoming more inclusive and social. Collaborative formats are critical for the next 100 million Indians to start their investing journeys. As more collaborations, discussions, and content for actionable investing decisions gain ground, investment behaviour will move towards becoming more social. Personal finance discussions are becoming more transparent about wealth, valuations, personal assets, and are no longer taboo or seen as private, closed-group discussions. This trend is also aided by the rising penetration of high-speed internet across India.
The newer, digital India has become the vehicle for a mammoth explosion of content generated both by users and developers across verticals, personal finance not being an exception to the rule. With a noticeable increase in platforms for discussions and dialogues as well as creation of communities, this trend is here to stay.
The investment management industry is also being disrupted by the growth of the internet and access. Fund management is becoming more decentralised and less concentrated with more and emerging investment managers throwing their hats into the ring. What was earlier focused on the top 50 research and fund houses developing products for the retail investor, is now becoming a more widespread trend. This is possible due to different technological developments that enable client onboarding, fee collection, transactions, reporting possible at scale and in a highly efficient way. These processes earlier would require human effort and bandwidth, and hence not very conducive for breakaway managers to support given their lower capital base. The emergence of platforms and APIs in the wealth space have resulted in managers and advisors being able to focus on what they do best (delivering the best advice and portfolio management) while their practice scales seamlessly on the back of robust technology. This has led to some of the best ideas to come from anyone and anywhere as opposed to requiring to have a seat on Dalal Street.
Given the changes in the ecosystem led by technology and risk appetite, as well as the power that is actually moving into the hands of the retail investor, an increased emphasis on creating and investing in portfolios for diversification will continue to be key in 2022 and beyond.
The writer is founder & CEO, smallcase.
The thoughts and opinions shared here are of the author.
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