The difference between investment products stems from two variables: risk and return. Stock is relatively higher risk and higher return. Bonds are relatively lower risk and lower return. There are extremes like cryptocurrency and stressed debt that are too high risk and too high expectations. There are very safe products with relatively lower returns, such as government bonds or overnight funds of mutual funds. Besides the fundamental differences, there are many features in financial investment products, such as liquidity (withdrawals/sales in the secondary market), differentiation of the underlying investment universe from similar products (large cap/small cap) or risk coverage (insurance). .

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

Here’s an analogy: Automakers introduce new models with certain features like parking sensors or dash cameras, but the engine remains the same as previous models. Computer manufacturers are introducing new laptops with features while the processor remains the same. The same goes for mobile phone manufacturers. This can be called packaging. In the field of financial investing, whenever a new product is launched, you need to get down to the basics and understand whether it is fundamentally new or an added feature.

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

According to an estimate, the highest proportion of new systematic investment plans (SIPs) registered in mutual funds from April to August 2024 were in the sectoral and thematic category at 26%. This was followed by small-scale funds (18%) and medium-sized funds (9%). What this means is that there are those who accept NFOs initiated by a subset of the broader investment universe, including investors new to the industry.

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Sometimes regulations facilitate innovation in investment products. When the alternative investment fund (AIF) regulation came into force 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. The Sebi board meeting held on September 30 stated that “the new product also aims to reduce the proliferation of unregistered and unauthorized investment schemes/institutions that often promise unrealistically high returns and take advantage of investors’ expectations of better returns.”

Minimum investment limit for new product ₹10 lakh per investor in a particular AMC. The new product is intended to add depth and diversity to the country’s investment environment through a new asset class. This will lead to product innovation.

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Solution

Sometimes you buy a car or laptop knowing that the engine or processor is the same if you find their features useful. You need to understand the “best in class” or “only with us” claims. Similarly, you need to be careful when choosing investment products. When a new passive fund is launched on an index with the same investment universe as another (e.g. top 100 or top 200 stocks by market cap) but with a new additional filter, this is a feature innovation. You can get this if it suits your purpose. To gauge whether an innovation is fit for purpose, you need to be clear about your requirements. This should be about your overall investment portfolio, not the ‘flavor’ of the time, such as small-cap stocks, for example.

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