Indian Financial Space, today has a plethora of products such as Direct Equity, Mutual Funds, Portfolio Management Services (PMS), Alternative Investment Funds (AIFs), Fixed Deposits, Equity Derivatives (F&O), Commodity Derivatives, Interest Rate Derivatives, Currency Derivatives.
- Direct Equity is specifically designed for Insiders such as Promoters, Strategic Investors, ESOP holders and large sophisticated Investors such as Institutions (Foreign and Domestic). These institutions invest on behalf of thousands of investors and so are capable of carrying greater risks than individual investors. If retail investors dabble in direct equity without adequate research tools, information asymmetry is likely to lead to poor results. Retail is likely to find itself on the wrong side of most trades.
- Futures & Options (Equity Derivatives) are designed for Institutional players to be able to hedge themselves in case they want to. When retail takes the bait, the results are poor.
- Mutual Funds are designed for retail investors who want to channelize their savings in a systematic manner and build long-term wealth. They provide an avenue for investors to benefit from the higher risk-return profile of equities while minimizing risk.
- Portfolio Management Services (PMS) is designed for HNIs with financial investments of at least 2.5 crores, NRIs, PIOs, OCIs and Retail FPIs (Foreign Portfolio Investors i.e. non-institutional foreign investors). They offer a higher risk-return profile than Mutual Funds.
- Alternate Investment Funds (AIF) are designed for UHNIs with financial investments of at least 30 crores, NRIs, PIOS, OCIs and UHNI FPIs. They are meant for sophisticated investors who want to take higher risks than are regulatorily possible within PMS.
- Commodity Derivatives are designed for Hedging by Value Chain Participants that usually consist of Companies and Firms with businesses that are suppliers/ users/ consumers of underlying Commodity. For example, ITC uses spices futures in the agri commodity space to hedge itself against the price fluctuations of commodities such as Turmeric, Coriander and Pepper. IOC, BPCL, Indigo use Crude futures to hedge their exposure to Crude Oil.
- Interest Rate Derivatives are useful for Banks, NBFCs, Housing Finance Companies, Insurance Companies and Institutions to hedge their Interest Rate exposures of either fixed or floating rate. They are also used for managing Asset-Liability Mismatches more efficiently.
- Currency Derivatives are useful for Exporters and Importers to hedge their currency exposures.
Often, I see examples of mis-selling by brokers to entice retail into areas such as Direct Equity, F&O, Commodity derivatives and Currency derivatives.