The investment environment has seen far-reaching changes in the recent past. There is a lot more convenience and transparency now. Better disclosures and constant regulatory changes have made the markets more structurally strong and sophisticated. Investors need to keep themselves abreast with the changes to not only adapt to same, but also to maximise the rewards.
Online trading for equities, introduction of futures and options, electronic transfer of funds, delivery of banking services through technology, online purchase of insurance, portability of health insurance are some of the changes that have changed the way customers invest in financial products.
Apart from the convenience, the technological and regulatory changes have helped retail investors in the following manner:
Lower cost of investment: The cost of investment has gone down significantly. During the late nineties, the cost of brokerage was almost 2 per cent. Today it has gone down to 0.15 to 0.25 per cent with low settlement failure risk. The regulators, namely SEBI and IRDA, have brought down the loads on mutual fund and insurance respectively over the period of time. The New Pension Scheme (NPS) has the lowest management fees (i.e. 0.25 per cent) for managing pension funds.
Increased competition leading to greater choice: The increased competition has resulted in better products. Earlier there was a limited choice for people to invest, namely few equity stocks, physical gold and real estate. Now people not only have a larger choice, but varied service providers too. There is more flexibility and adaptation in the products. This can be seen not only in the investment avenues, but also insurance (such as health insurance, ULIP, term insurance). Most insurance companies offer huge discount for policies which are bought online. In the life insurance space these could be termed as insurance policies or health and travel insurance products in the non-life space.
Ease of investing and exiting: Gone are the days where there was a need to stand in a big queue to submit IPO application forms or mutual fund subscription. Now investors can make their investment online. Not only investing, exiting or redeeming the investment is also easier.
Risk diversification: Now investors can choose as diverse products as fixed deposits to commodities or gold to currency for investing. They can hedge their risk by buying into futures and options.
Security: With technology investors, have been able to make their investments more secure and less prone to physical damage or loss. For instance, a commodity like gold can be bought and stored electronically.
Investors who have not taken the benefit of the changes in the investment environment due to their hesitancy in adapting to technology, or limited awareness about the products or lack of conceptual clarity of products are depriving themselves of a superior investment avenue.
Let's look at some ways investors can benefit by adopting some new financial habits or products:
Opt for Systematic Investment Plans: Most investment products nowadays allow systematic investing. A systematic investment plan allows investors to invest a fixed or variable sum of money over a period of time. By doing so, he can average out its price of investment.
Buy online: Most financial products are now available online and this is an easier and, often, cheaper way of buying. For instance, in case a person buys physical gold or jewellery, he has to pay VAT, keep it in safe custody and so on. However, in case of gold Exchange Traded Funds, he need not incur much of these costs. An added benefit is in terms of better liquidity and no storage hassles. Similarly, insurance products bought online are cheaper since the company passes on the savings made by way of not paying the intermediaries (in this case the insurance agent) to buyers in the form or lower premiums.
Invest in futures and options: Futures and options allow investors to hedge their risk against an investment. It can also be used for speculation purpose. By having proper hedging strategies, investors can minimise their losses due to market vagaries and at times make speculative gain too. Investors should not shy away from new generation avenues due to ignorance.
The facts and figures show that investors have shied away from the new generation investment avenues due to ignorance.
A classic example is that of New Pension Scheme. Although the scheme has generated more returns than the underlying market, we do not see many investors going for investing in the same.
Investors should change their habits and outlook and take advantage of the evolutions in the investment environment. By doing so they will be able to meet the financial challenges of the modern times.