Over the past few years, the Indian investment scenario has seen a massive transformation. While traditional financial products have been the preferred choice of Indian households over the decades, investors are now flocking to newer investment instruments on the back of increasing financial literacy and penetration of digital services.
This blog takes an in-depth look at the reasons why newer market-linked financial products are gaining popularity among the new-age Indian investors.
The transition to market-linked assets
For decades, capital protection was the primary goal for most investors. However, with digital literacy, ease of access, and availability of various instruments, this focus has now changed to generating inflation-beating returns. Investors are choosing equity and index-based products over fixed-income products these days.
This shift has enabled investors to participate directly in the economic growth of the country and take calculated risks in the market in order to reap a greater potential for long-term wealth creation. Some of the reasons behind this shift are:
The demand for real-time liquidity and control
Technology has revolutionised the way ownership is managed across various asset classes. With the introduction of digital trading applications, investors today want high liquidity and complete control over their portfolio. With the help of modern financial instruments, market participants can buy and sell many of these investment vehicles in real-time, during trading hours.
For example, a common question among beginners is what is ETF (Exchange Traded Fund) is. It is essentially a basket of securities that tracks an underlying index, and it can be traded throughout the trading hours, just like a stock. This immediate tradability offers high liquidity and complete control to investors over their investments.
Cost efficiency
With the increasing awareness among Indian investors, they are now paying closer attention to the hidden costs of investing, such as expense ratios and management fees, which slowly eat up their net returns. The new ways of investing offer several cost-efficient investment options, the most popular ones are ETFs and mutual funds, which often lead to an ETF vs mutual fund debate for investors.
Thus, with these instruments, investors are increasingly realising that saving on these recurring fees can substantially boost their compounded returns over a long horizon.
Low capital requirement
Historically, building a diversified portfolio across top-tier blue-chip companies required significant capital, making it out of reach for the average retail investor. Modern market instruments have democratised this space by lowering entry barriers with the advent of SIPs, which allow investors to begin their investment journey with even Rs 100.
Thus, when an investor wants to gain exposure to the broader market, they can start a SIP, enabling disciplined, small-scale investing from day one.
Diversification
Diversifying the portfolio is an important aspect for investors looking to build wealth over time. Modern investment vehicles like ETFs and mutual funds inherently provide built-in diversification. Retail participants can spread their risk evenly by investing in different modern investment instruments rather than taking the high risk exposure of holding individual securities.
Thus, within a diversified portfolio, if a particular company or sector in the portfolio is underperforming, the performance of other sectors in the portfolio will help to mitigate the underperformance of a particular company or sector.
Conclusion
In recent years, Indian investors’ investment habits have changed significantly from traditional savings to market-linked investments. This change reflects a maturing financial ecosystem, where investors are also considering other factors beyond capital protection while choosing their investment instruments.
Thus, by investing in these modern investment instruments, investors can build long-term wealth while enjoying the benefits they offer.