Indian retail investors encourage risky investments while chasing returns

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An eager class of Indian investors, largely driven by millennials, are embarking on riskier investments, ranging from peer-to-peer lending to cryptocurrencies, in hopes of boosting returns rattled by one of the Asia’s worst inflation rates.

The sheer number of individuals pouring money into new, lightly vetted assets sets India apart, after the pandemic fueled the rise of retail investors globally and left many exposed to potential significant losses. Others have had more luck and won victories by racing to buy a first car or a first apartment.

In Mumbai, 28-year-old Pratik Vora, who works in finance, avoids the vanilla savings deposits that have been popular with Indians for generations. Instead, it invests in stocks and cryptocurrencies. A self-taught investor, Vora started with stocks in 2015 and ventured into crypto investing in 2019 to buy a bigger house. It only narrowly escaped the giant cryptocurrency plunge this year after pulling out early to avoid new taxes in India, but it is undeterred.

“Right now, a bank fixed deposit is the worst investment for an individual because inflation-adjusted returns are negative,” Vora said. “I had a few setbacks too, I lost money, but these are my learnings. My age allows me to take risks.

Regulators everywhere are grappling with these risks, but the sheer scale of change in India is creating unique new regulatory complexities for Prime Minister Narendra Modi’s government. Long a country where households deposited their savings in the bank, around 43 million capital accounts have been added in India since the start of 2021, more than the total population of Belgium, Greece and Portugal combined.

As inflation rose above 6%, bank deposits became increasingly unattractive because the real yield on time deposits turned negative. Consumer price increases have reached the highest levels in decades in many countries around the world, with a reading last week in the United States that hit a 40-year high, adding to a list of troubling data .

Renewed sentiment that central banks will have to do more to fight inflation is also making financial markets more volatile, as another selloff in asset classes underscored late last week.


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Many young Indians who want the chance for bigger returns are nonetheless venturing into even more volatile territory.

Ekmmeet Singh, managing director of peer-to-peer lending platform Lendbox, estimates that Indians invest around $3 billion a year in new-age alternative investment platforms. They separately had $6 billion invested in crypto assets, a member of a parliamentary panel said last year.

Retail investors have also been attracted by the investment facility created by the dozens of fintech startups that have sprung up, enabling investments in minutes on mobile phones or digital platforms.

New Indian fintech companies promise high returns on often riskier products. Jiraaf, an alternative asset platform, markets investment products related to discounting bills that can yield 9% to 14% for 30 to 90 days and corporate debt with tenors of 1 to 3 years that yield 8% to 20%, according to its website. Grip says investors could realize up to 21% pre-tax returns in leases. BondsIndia.com advertises returns of 275% over what fixed deposits are yielding.

But with the Reserve Bank of India raising rates and tightening liquidity to stifle inflation, there is a growing risk that the assets underlying these products will come under strain.

Jiraaf and the other companies say they work hard to protect investors. Lendbox said it uses data and other mechanisms to ensure the quality of its borrowers is top-notch and to work to collect outstanding loans. Grip, the asset leasing company, says it conducts rigorous due diligence on all transactions and uses measures such as security deposits to protect customers.

“Indians have limited investment opportunities,” said Saurav Ghosh, co-founder of Jiraaf. “We wanted to offer high yield fixed income products that bridge the gap between equities and fixed bank deposits.”


Leasing

In Mumbai, Anirudha Basak, 27, who works at a Mumbai-based fintech platform, says he and his family have seen the benefits of alternative investments. After a casual chat with a product manager on another platform called Leaf, Basak invested around 500,000 rupees ($6,404) in leasing assets on behalf of his mother, who he says now receives monthly interest payments.

But the big elephant in the room remains crypto, with exchanges reporting massive jumps in the user base in smaller towns. The central bank has pushed back the asset, citing financial stability concerns, but the government has yet to decide on its legal status.

Crypto markets have crashed recently as stagflation concerns weigh on risky assets, with Bitcoin falling to the lowest level since December 2020 and other major tokens like Ether also dropping sharply on Monday.

The Reserve Bank of India has set up a department to oversee fintech and regulates non-banking financial entities like peer-to-peer platforms. The capital markets regulator, the Securities and Exchange Board of India, also plans to review corporate bond platforms.

“Traditional asset classes such as equities, fixed income, real estate, etc., are well covered by the regulatory framework with adequate investor protection built into their respective regulations,” said Srikanth Subramanian, Designated CEO of Kotak Cherry, an investment platform providing a range of products to retail investors. “However, in the case of emerging asset classes like crypto that are not yet within the gamut of a dedicated securities regulator, the gap still exists and needs to be filled by regulation.”

In recent years, the risks of alternative platforms with limited regulatory oversight have been highlighted elsewhere in the world. China saw a wave of defaults on peer-to-peer lending platforms in 2018, fueling a regulatory crackdown.

It can be difficult for new investors to keep up. As a software engineer in New Delhi, Gagandeep Singh said he made a series of investments over the past few years that cost him money, and he lent on a peer-to-peer platform that left him with losses when some borrowers stopped repaying him. .

Now working for an information technology firm in Canada, Singh, 37, focuses primarily on passive index funds, but isn’t completely shy about taking risks. “I keep 5-10% for risky bets,” he said. “It’s the money I play with. It gives me the shivers.

Singh’s latest obsession is cryptocurrencies, where he invested nearly $10,000 at the top, although the value of that has plummeted. “I could lose money,” he said. “It could drop to zero – or it could make me rich.”

Others take a similar approach. The head of marketing for an educational technology company in Mumbai, Sunny Amlani, 38, has been stuck with a 17% loss on his crypto investments. A tax regime that does not allow losses in crypto to be offset against any other income makes it difficult to exit digital currencies.

Still, he’s not giving up cryto altogether, he said. “I think it’s a good time to stay and I’ll definitely wait a while to see where it goes.”

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