Sunday, June 7, 2015

HIGH RISK HIGH RETURN...Where are we Heading Again

High Risk High returns where the end is. High Risk and high returns in the last decade of the bull market of the Indian equity market have lead many families to witness suicide cases, families getting broken, physiological and mental problems and even growth of alternative crimes. We have seen young fellow committing suicides due to margin funding based equity trading under the regime of High Risk High Return. I call it leveraged death created from high risk high return theory.  What type of product we need and what we are designing needs to have a deep look?

Bull markets of the Indian equity have spooked many investments options and more complicated structured products. The birth of these structured products have been due to two reasons primarily,1) Plain vanilla products were available too much and 2) We just copy pasted the financial products which did not work anymore in developed economies. Alternative investments funds in Indian are defined under two categories 1) Equity and 2) Real Estate. I fail to understand that why alternative funds definition is restricted to this as compared to the global developed economies. We don’t have metal basket ETF, neither crude basket ETF neither commodity ETF. We all know when equity markets go down the commodity markets goes up as they have a negative co-relation. But how many of us took the Commodity ETF based products as alternative product in India.  AIF segment have been growing in India after the new government came into force. But are we focusing on easy structure products where a broad segment of the investor’s community can come inside and invest. No we are not doing the same. We are creating products which high risk and the income from distribution are high and they are all somehow of the other are leveraged products. In equity we all know that there is saying that high risk high return. But will anyone tell me where the high risk ends and how long the high return will grow.

India lacks clarity on alternative product basket. We are more concerned about products where complicated mathematical formulas are created to back test the product so that approval can be taken form regulatory. My concern is that how many regulatory checkups are being done after the fund is launched in terms of the same back test. Back test methods are never correct in the real life. Secondly miss selling still happens as the seller discloses limited and structured stories which will help him to get the business. Down side risk are cooked and often structured to derive the sale from the investor. Secondly investors forget that when markets and economy goes for a toss no product can survive the down side. It’s the asset class diversification which survives the portfolio. Alternative investment funds also fail under this category. Recently after the Indian equity markets awaked from sleep AIF segment has again got back into shape. AIF managers raised capital commitments worth Rs.20,457.45 crore from affluent Indian investors till the end of December from Rs.11,186.36 crore in the previous year. Of this money that was committed by investors, asset managers raised funds to the tune of Rs.7,790.52 crore till December compared with Rs.2,883.49 crore collected a year earlier.

Well the numbers are impressive but how much return would be generated from equity and real estate segments as an asset class is a question.  The recent class of AIF category is the IDEA related business where growth is expected to be stupendous. Unlisted based company based products have come up in AIF segment. These products have been marked as high risk, high return products followed with structuring based on different investor segments.  The return mandate for investments in unlisted startup companies is that you may get return or may not. Max return based on FD rates. I find these AIF products of unlisted companies just as Chit Funds. We are creating products which are designed like professional gambles.  We all know that Indian real estate market is flooded with inventory and developers are having problem to clear and in between we have introduced AIF products in these segments. Don’t we sound crazy about the same. High Risk and High Return –investors should know the end of risk and end of return.

Don’t you think once the market goes for a toll then the risk appetite comes down to zero and spreads like wild fire among the investor community then these AIF will simply disappear. This will create problems for the genuine startups and ones who are simply created to dupe the markets taking advantage of the AIF segment.  Are we creating a market like US where high risked products lead to an massive erosion of wealth across the segment.  In the process of creating wealth we are simply strategizing the products where erosion of wealth will happen within a blink of an eye. We are developing products in a country where financial instruments itself are less penetrated and less understood. Where the population is focusing on increasing its wealth and getting into the category of wealth within the levels of developed economy why we are focusing on unpredictable investment options. 

This is one of the key areas where we need to focus. Financial companies are forgetting that these high risk products would lead to substantial loss of clients and long term business for the organizations. Indian markets and its investors are designed in some other way which is completely opposite of the developed economies and further when loss happens investor behavior remains the same.  What I find that in India financial power houses and their products houses have limited their product basket and there is lack of vision. When we all know that commodity prices and equity markets goes down then why don’t we bring ETF and create FOF of ETF’s. We have limited our products innovations to limit the segment and we are creating high risk products which will have devastating results.


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