Ideas for financial investments: innovation needed in product and packaging

There is a fundamental difference between financial investment products and other conventional products that we consume. Investing does not have a ‘product’ with a look and feel. You sacrifice your current consumption and expect to get a higher amount back in the future. An investment product is created by a manufacturer through the brochure/other literature, and the terms are formalized in the offering document. The higher amount you get back in the future is known by different terms: capital growth (shares and gold), interest (bonds) and rent (real estate).

The difference between investment products arises from two variables: risk and return. Equities entail relatively higher risk and higher returns. Bonds have relatively lower risk and lower returns. There are extremes, like very high risks and very high expectations, like cryptocurrency and stressed debt. There are very safe products with relatively lower returns, for example government bonds or overnight funds or investment funds. Apart from the fundamental differences, there are several characteristics of financial investment products, for example liquidity (withdrawal/sale on the secondary market), differentiation in the underlying investment universe from similar products (large cap/small cap) or risk coverage (insurance). .

Innovations in financial investment products are happening every other day within the regulatory framework of Sebi, RBI, Irdai and other regulators. The investor must scratch the surface and understand whether the innovation is significant (product innovation) or a change in features (packaging).

Here’s an analogy: car manufacturers introduce new models with certain features, such as parking sensors or dashcams, but the engine remains the same as the previous models. Computer manufacturers introduce new laptops with features while the processor remains the same. The same goes for mobile phone manufacturers. This can be referred to as packaging. In terms of financial investments, when a new product is launched, you need to get down to the basics and understand whether it is fundamentally new or if a feature is being added.

Sometimes the question arises: why are so many investment products being launched? Sometimes there is a flurry of new fund offerings (NFOs) from the mutual fund industry. There are so many portfolio management services (PMS) with multiple offers. There will be alternative investment funds (AIFs) with their placements. As product manufacturers, it is their job to develop variants, just like car manufacturers or mobile phone manufacturers do. They must play within the playing field that the regulator offers. For example, mutual funds may have one fund per category, such as large-cap or small-cap. However, in sectoral or thematic categories they can have as many as there is no defined limit.

According to one estimate, the largest share, 26%, of new systematic investment plans (SIPs) registered in mutual funds between April and August 2024 fell into the sectoral and thematic category. This was followed by small cap funds (18%) and mid cap funds (9%). The implication is that there are enthusiasts for NFOs launched with a subset of the broad investment universe, including new investors to the sector.

Also read: Sebi’s proposal for early deployment of new fund money could help investors

Sometimes regulations facilitate innovation in investment products. When regulations for alternative investment funds (AIFs) were introduced in 2012, there was clarity about the new products that could be launched. Now, Sebi has introduced a new asset class with differentiated basic rules. During the Sebi board meeting on September 30, it was mentioned that “the new product also aims to prevent the proliferation of unregistered and unauthorized investment schemes/entities, which often promise unrealistically high returns and exploit investors’ expectations for better returns” , to limit.

The minimum investment limit for the new product will be ₹10 lakh per investor in a particular AMC. The new product aims to add depth and variety to the country’s investment landscape through a new asset class. This would lead to product innovation.

Also read: Investment jugaad: How this Pune-based executive achieved financial independence at the age of 46

Conclusion

Sometimes you buy a car or laptop knowing that the engine or processor is the same, if you find the features useful. You have to look through the claims of ‘best in class’ or ‘only from us’. You must also be judicious when choosing investment products. When a new passive fund is launched on an index that has the same investment universe as another index (e.g. top 100 or top 200 stocks by market capitalization), but with an additional filter that is new, this is a signature innovation. You can take this, if it suits your purpose. And to gauge whether an innovation fits your goals, you need to be clear about your wishes. It should not be about the ‘taste’ of the time, for example small-cap shares, but about your total investment portfolio.

Joydeep Sen is a business trainer (financial markets) and author. Opinions are personal.