There is a fundamental difference between financial investment products and other conventional products we consume. Investments have no ‘product’ with a look and feel. You are sacrificing your current consumption, expecting to get back a higher amount in future. An investment ‘product’ is created by a manufacturer through the brochure/other literature, and the terms are formalized in the offer document. The higher amount of money you get back in future is known by various terms–capital appreciation (equity and gold), interest (bonds) and rent (real estate).
The difference between investment products comes from two variables: risk and return. Equity is a relatively higher risk and a higher return. Bonds are relatively lower-risk, lower-return. There are extremes like very-high-risk and very high expectations, such as cryptocurrency and stressed debt. There are very safe products with relatively lower returns, for example, government bonds or overnight funds of mutual funds. Apart from the fundamental differences, there are multiple features in financial investment products, for example, liquidity (withdrawal/sale in secondary market), differentiation in the underlying investment universe from similar products (large cap/small cap) or risk coverage (insurance).
Innovations in financial investment products occur every other day within the regulatory framework provided by Sebi, RBI, Irdai, and other regulators. The investor has to scratch the surface and understand whether the innovation is significant (product innovation) or a change in the features (packaging).
Here is an analogy: Car manufacturers introduce new models with certain features, like parking sensors or dashcams, but the engine remains the same as the earlier models. Computer manufacturers introduce new laptops with features while the processor remains the same. The same is true for mobile phone manufacturers. This may be referred to as packaging. In the financial investment space, when a new product is launched, you have to get to the basics and understand whether it is fundamentally new or a feature being added.
Sometimes, a question is raised: Why are so many investment products being launched? Sometimes, there is a spate of new fund offers (NFOs) from the mutual fund industry. There are so many portfolio management services (PMS) with multiple offers. There are alternative investment funds (AIFs) coming with their placements. As product manufacturers, it is their job to develop variants like car manufacturers or mobile handset manufacturers do. They need to play within the field provided by the regulator. For example, mutual funds can have one fund per category, such as a large-cap or a small cap. However, in sectoral or thematic categories, they can have as many as there is no defined limit.
According to one estimate, the highest chunk, 26%, of new systematic investment plans (SIPs) registered in mutual funds from April to August 2024 was in the sectoral and thematic category. This was followed by smallcap funds (18%) and midcap funds (9%). The implication is that there are takers for NFOs launched with a subset of the broad investment universe, including new-to-industry investors.
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Sometimes, regulations facilitate innovation in investment products. When the alternative investment fund (AIF) regulation was introduced in 2012, there was clarity on the new products that could be launched. Now, Sebi has introduced a new asset class with differentiated ground rules. It was mentioned in the Sebi board meeting held on 30 September that “the new product also aims to curtail the proliferation of unregistered and unauthorized investment schemes/entities, which often promise unrealistic high returns and exploit investors’ expectations for better yields”.
The minimum investment limit for the new product will be ₹10 lakh per investor in a particular AMC. The new product is intended to add depth and variety to the investment landscape of the country through a new asset class. This would lead to product innovation.
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Conclusion
Sometimes you purchase a car or laptop, knowing that the engine or processor is the same, if you find the features useful. You have to see through the claims of “best in class” or “only with us”. Similarly, you have to be judicious in your choice of investment products. When a new passive fund is launched on an index that has the same investment universe as another one (e.g. top 100 or top 200 stocks as per market capitalization) but with an additional filter which is new, this is a feature innovation. You may take this, if it suits your purpose. And to gauge whether an innovation suits your purpose, you have to have clarity on your requirements. It should not be the ‘flavour’ of that time, for example, small-cap stocks, but about your overall investment portfolio.
Joydeep Sen is a corporate trainer (financial markets) and author. Views are personal.
