Given the current volatility in the markets, investors should focus on an asset allocation framework, says Vasanth Kamath of smallcase
Last financial year saw the unfolding of several trends in the asset management and wealth space. While some were new behaviours, others were accelerations of existing shifts. Despite a second and more severe year of the pandemic, the equity market saw new heights and a record number of demat accounts were opened as interest in entry into the stock markets for first-time investors continued to peak as they tried to book profits from the bull run.
Cryptocurrencies ruled the sentiment on new exposures as investors looked to diversify. A new credit instrument – Buy Now Pay Later (BNPL) – gave relief to those with covid-induced financial stress.
Here are some of the latest trends are likely to take the wealth industry by storm in the new financial year.
As new asset classes gain momentum and visibility, taking an indexing approach to many of the new trends burgeoning in trading make sense. Indexing as an investment strategy, which is; investing in index ETFs and mutual funds, are rightly considered as a sound financial approach. For example, if there was an index (mcap, top 10, etc) for crypto/NFTs, it is simpler for the average investor to take exposure instead of having to select the right crypto coins or NFTs.
As a passive investment strategy that duplicates the yields from a benchmark index, index investing comes with a lot of benefits. As compared to actively managed strategies, indexing offers increased diversification. The success of indexing as a strategy has already played out globally with index funds/ETFs having more assets in the US. In India last year, this was witnessed in domestic equities. According to a report by the Association of Mutual Funds in India (AMFI), the number of folios in index funds has risen to about 2 million, more than doubling from a year back.
Indexing for both established and emerging assets will be the gateway for new investors to start taking exposures, and eventually many of them will lead to smarter decision making and allocations to specific constituents. This also helps in maintaining asset allocation in a simple and transparent manner.
Given the current volatility in the markets, investors should focus on an asset allocation framework. The market (Nifty for e.g.) has gone down by 5% in the last 6 months, gold (gold ETF for e.g.) has risen by 11%. In order to continue maintaining allocation to various asset classes as part of the framework, investors could invest more into equities as its proportion in their portfolio would have decreased. They could do this from their new incoming cash flows or by redeeming a suitable percentage from other asset classes for investors who are not thinking top-down about their portfolios, and a good practice to start allocating to other asset classes including fixed income, gold.
Capital Markets Infrastructure
The infrastructural institutions of capital markets that include enablers of capital markets have become increasingly important in the last few years.
CMIPs (Capital Markets Infrastructure Providers) include interdealer brokers, information services, trading venues, technology providers, clearing houses, servicing firms and securities depositories. Examples such as exchanges (NSE/BSE), depositories (CDSL/NSDL), RTAs (CAMS/KFintech), APIs & platforms like BSE StAR MF, smallcase Publisher and Gateway.
CMIPs enable participants of capital markets such as brokers, asset and investment managers, advisors, distributors, and wealth managers to conduct their business efficiently while allowing them to scale up effortlessly with technology. It is linked to two megatrends, financialization of savings and globally connected financial markets. As new assets (such as fixed income/bonds, crypto, ETFs, and real estate) become transactable for individual investors, this role becomes more pivotal and key. Business becomes easier as CMIPs leverage data held at an aggregate level, for better decision making, analytics and transparency. The new technology and user experiences operate across the entire spectrum.
The future of investing will be social. More inclusive 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, retail investors have found their niche. Investors are using social circles to collaborate for feedback on discussions on their portfolios and benchmark on personal finance goals.
The subscription economy stands for a new consumption landscape where companies with a conventional pay-per-product (or service) model are moving towards subscription-based modes. What was once considered a slow-moving phenomenon has started to explode in the last two years. Subscriptions have crossed the fifty million user base barrier and continue to grow rapidly.
However there has been a steady and explosive growth of the consumption as well as spending power of Indians where consumption use-cases are not just transactional but also are growing to periodic and regular usage. These consumption use-cases have been helped infrastructurally by the credit cards boom as well as UPI autopay feature. The subscription economy enables the consumer access to diverse and varied options as the business is not looking to convert into a customer nor are they looking to make a sale. As such the end user continues to get more for the same price.
We expect these ideas to become mainstream and more prevalent this year.