An independent study by economist Edward N. Wolff in 2017 suggested that 40% of the wealth in the US in the same year was owned by the wealthiest 1% of its households. As such, it isn’t hard to imagine that the global scenario suggests a much significant disparity. However, innovations in distributed technologies over the last decade have shown a promise of a better distribution of wealth. This, in turn, suggests a better distribution of wealth.
The current startup world or the world of ‘entrepreneurs’ is severely undercapitalized. Most capital markets require a minimum amount of funds to invest. This restricts access of the non-wealthy to private companies and provides little to no access to equity investment for small businesses.
Technologies & innovations such as cryptocurrency, equity crowdfunding, various forms of democratization of public investment domains & even e-commerce have opened the gates of capital investment for the public.
The two-decade-old (dot)-com boom taught us that most companies aren’t going to survive the hype. However, companies like Amazon & Google not only survived the boom but also made it big. As was true, then, innovation initiates excitement among investors. Excitement, however, is a poor investment advisor.
Until Title II of the JOBS Act was implemented in the US, angel investors and venture capitalists were perhaps the only ones with access to investment opportunities in startups and growing companies. Investing in hedge funds was also impossible without having at least a million in the bank.
Real estate crowdfunding companies like CrowdVenture allows investors in the US to invest as little as $10,000. This concept has opened up a massive dialogue in the industry among lobbyists & experts.
“You often need to have at least $200,000 in order to be a part of a real estate investment club. Real estate crowdfunding changes that,” said Matthew Sullivan, the founder and President of CrowdVenture.
Crowdfunding investment enables entrepreneurs with limited access to traditional sources of finance to get funding. It also allows new opportunities for potential investors & households with modest income to invest. Private investors seeking high returns are now drawn to lending platforms or peer-to-peer (P2P) platforms.
Some other equity-based crowdfunding platforms are SeedInvest, WeFunder, CircleUp, and StartEngine. The basic underlying concepts for all these are that people can invest very little money in return for equity. It is, indeed, an incredible step towards democratizing investment.
However, this mode of raising funds comes with its own roadblocks. Small businesses and startups can take funds from non-accredited or micro investors, but this also means that there can be numerous players involved with little jurisdiction, thus making the process complex and vulnerable. Accredited investors are likely to have the ability to absorb losses from riskier ventures than non-accredited ones. As a result, the decision-making process for the latter is expected to be longer.
Mutual Funds & SIPs
Over the last decade, investors have diversified allocation of assets beyond traditional stock and bond portfolios. Their pursuit of mitigating risk has led them to seek non-traditional investments. Such alternate investment strategies over time have become more mainstream and accessible for investors, regardless of how deep their pockets are. Now, it is a well-known fact that alternative investments used to be the exclusive operational domain of various institutions. However, liquid alternative strategies, mutual funds & exchange-traded funds (ETFs) allow easier access to related investment opportunities & strategies for individual investors.
Recent times have seen a great deal of interest in liquid alternatives—mutual funds or ETFs that attempt to mimic alternative investment strategies. It is a given fact that alternative investment strategies do not always translate well into a liquid structure; however, they do allow easy access.
Now, the mutual funds market in India has been a significant contributor to the financial and banking system of the country in recent times. Several studies have chalked this up to its correlation with changes such as being made available to the masses at prices as low as INR 100, low expense ratios, and relatively high returns.
Lower mutual fund loads have increased the feasibility for the less well-to-do households to own diversified stock and bond portfolios. This to an impact degree that the reliance of Indian families on mutual funds to own equity had shot up by 40% in Class A cities & 50% in Class B & Class C cities between 2016 and 2017. The overall investments in mutual funds during that same period was 2.8 lakh crores.
A part of the reason for such a shift in patterns could also be the low rate of returns on physical assets such as gold & other durable goods.
A report by Economic Times India, revealed that the share of equity investments in India’s household assets reached a decade high in 2018 because of the acceptance of mutual fund investments among retail investors. The data stated a spike of 4.6% in FY18.
This proportion was similar to what the economy saw in 2008; however, this time, instead of direct equity investment raising the roof, it was the ‘Systematic Investment Plans’ (SIPs). SIPs alone housed an inflow of around INR 8,200 crore in December of 2018.
Current SIPs offer a solution to a market conundrum among small-time investors. There are large-cap investors, there are mid-cap investors, there are small-cap investors & then there are investors with little market knowledge and little appetite for risk. As a part of SIPs, mutual funds are the most sought-after avenues for investment for such investors in India.