Fads Dominate Moments, but Innovation Shapes Future

Over the past 3 decades India’s financial markets have seen exceptional innovation, growth and maturation. In fact, each decade has seen upsurge of a new theme and that has contributed to the market’s overall growth.

1990s – The Infrastructure Shift

The 1990s, following India’s economic liberalization, marked the start of this transformation. The establishment of the National Stock Exchange (NSE) revolutionized trading by replacing the traditional open outcry system with a more efficient, terminal-based live trading system. However, this shift was only the beginning.

The market has since evolved with advancements such as the introduction of depositories, faster settlement cycles, increased transparency, and the widespread use of technology through mobile apps and algos. This gradual progression culminated in a more streamlined, secure and dynamic trading environment. The participation has grown multi folds and the participants are also extremely varied.

2000s – The Birth and Growth of Derivatives

In the 2000s, the introduction of derivatives marked a significant turning point. Moving away from the unregulated “Badla” system, the market adopted a more organized framework. In the years following the 2008 global financial crisis, participants began leaning towards options trading, reflecting a more mature investor base. With an expanded range of asset classes and a deeper understanding of financial instruments, these markets are poised for further growth. Already NSE is one of the largest exchanges globally in terms of derivatives contracts traded.

2010s – The Rise of Passive Investing and Change in Mode of Investing

The period of 2010s, period saw meteoric rise in Mutual Funds as an investment platform. This was along with innovation in products/ investment style and participation by investors. Passive investment products such as Index Funds, Exchange-Traded Funds (ETFs) and now Smart Beta Funds have become mainstream.

The popularity of Systematic Investment Plans (SIPs) surged, and direct investments also gained traction. Investors are getting increasingly aware and discerning, recognizing the distinctions between different schemes and investment strategies.

These trends are long-term, and it will take time for them to fully mature. However, the AUM of passive funds and monthly gross SIP numbers speak for itself.

2020s  – Possibly a New Era of Risk Adjusted Strategies

Looking ahead to the 2020s, the focus may shift towards achieving better risk-adjusted returns, with an increasing emphasis on actively managed funds that employ long-short strategies. Several factors indicate this shift:

1. The global economy is becoming more interconnected, meaning issues and opportunities in other markets may impact India, creating opportunities for long-short strategies.

2. With rising asset volatility, managing this risk will be crucial for investors and fund managers alike.

3. Investors will demand more sophisticated approaches to managing downside risk, with a focus on protecting capital during downturns while still capturing upside potential.

4. The growing complexity of financial products will make it necessary to implement effective hedging strategies.

5. As investors become more sophisticated, the demand for customized investment solutions will increase, this would more likely be on the risk – adjusted returns side.

6. The expanding number of listed companies and indices presents opportunities for shorting companies facing weak cycles and generating alpha within sectors.

7. The growing universe of derivatives will make it easier to create multiple strategies, including short positions.

In conclusion, the current trends are only the beginning, the coming years promise even more innovation and sophistication in the financial landscape. The vision few years from now would be creation of an ecosystem of Long Only, Passive and Long-Short portfolios.

**The above views are personal.