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India has historically been a savings-dominated society, usually only investing in guaranteed return products like fixed deposits or commodities like gold and real estate. Indian society’s historical risk aversion can be seen by the fact that only 2-3% of India’s population participated in the stock market before 2020 which made up ~4% of Indian household wealth.
Indians traditionally have preferred real assets (those you can see, touch, and feel, such as gold and real estate) to financial assets (those that derive their value from a contractual claim on an underlying asset). Unfortunately what this means is most Indians haven’t been participating in wealth creation via the public equity markets.
On the other hand, the average American has had an entirely different approach to investing. ~30% of all US household assets are invested in equities, ~20% in real estate, and a negligible amount in gold. They seem to have a different outlook on the world, and risk in particular. Meanwhile, the UK, which has a GDP similar to India’s, has a mutual fund industry over five times the size of ours.
However, the pandemic compelled everyone across the country to reconsider their spending and investment habits and this led to the number of Demat accounts increasing by 2.2x and the combined Assets under Custody for the NSDL and CDSL also doubling during this period. India’s largest retail stock broker – Zerodha, recently crossed the landmark of having over 1 crore accounts on their platform.
Currently, there are over 9 crore active DEMAT accounts and even if we take the conservative estimate of 2/3rd of these accounts belonging to unique individuals (as one person can have more than one Demat account) then this equates to there being over 6 crore active participants in the stock markets today! While it is still only about ~4% of the total population and ~8% of the working-age population in India, it shows an appetite for equity investments in the country.
That being said, India still has a lot of catching up to do.
With the growing interest in equity and investments coupled with tailwinds such as UPI, democratized internet access, cheap smartphones and the adoption of digital payments due to the pandemic, the Indian Investment-tech industry is where you’d want to put your money through and also after.
Investment tech start-ups are a subset of fintech start-ups, including all companies that provide software tools and solutions to facilitate investing. They also include companies that provide financial data and related analytics.
With rising digital adoption and a growing base of investors on investment tech platforms, the Indian Investment-tech market is set to grow from US$23bn in FY21 to over US$63bn by 2025.
SEBI initiatives in the past 4-5 years have also helped the Investment Tech industry in India. Some of the actions taken by SEBI include a regulatory sandbox for investment tech firms to experiment on a pilot basis, allowing e-commerce entities to sell MFs on their platforms, permitting investments into MFs via payment fintech, easing rules for fintechs to become MF manufacturers and much more.
Regulatory tailwinds for the Investment Tech sector:
In 2019 SEBI and RBI introduced 3 circulars outlining different types of regulatory sandbox mechanisms. These frameworks provide for live testing of innovative products on limited customers with certain regulatory relaxations. In some cases, SEBI provides for offline testing of products with the help of data provided by certain regulators which are not otherwise available to such entities.
These frameworks not only made it easier for startups to innovate at a faster pace but also made sure to have enough safety nets for retail investors, thus increasing the trust in the system and increasing adoption.
- Permitting investments into Mutual Funds via payment fintech:
In FY18 SEBI allowed payment apps such as PhonePe and PayTM to become mutual fund marketplaces. This introduced the concept of mutual funds and investing to millions of the underserved population who previously could not easily invest in mutual funds without a broker.
In December 2020, SEBI released a circular allowing fintechs to get Mutual Fund licenses as long as they cleared some of the criteria set by them. Following this several startups and fintech startups and even traditional companies applied for MF licenses. Angel One, PhonePe, Helios Capital, Alchemy Capital Management, Zerodha and Navi were a few of the companies that successfully applied for a mutual fund license.
This increases the scope for competition and innovation in the mutual fund space which was previously dominated by traditional banks or legacy players such as HDFC, ICICI, Mirae, Motilal Oswal, etc. that catered to only a small section of the population.
These tailwinds and a positive regulatory environment mean that what took decades to adopt in countries like the US could take a fraction of that time here. This has spurred the inflow of capital and talent into the investment tech space and has led to the opportunity in the space that we see today.
Investment-tech landscape in India
The Indian Investment-Tech landscape can be broadly divided based on their business models:
The initial influx of capital in the investment tech space came to the new age broking startups. As their business models and customer monetization strategies have been the easiest to monl.\etise and generate profit. Robo Advisory platforms were the next model to attract investments. There has been recent interest in micro-saving products. Fello raised $1mn in its Seed round and Jar raised $32mn in its last funding round. Wealth management and neo-banking apps for the younger generation have also seen considerable interest with Jupiter raising $86mn in their last round and Akudo raising $4.2mn in their rounds led by Y-Combinator.
In the future, it looks quite likely that there will be consolidation between these sub-segments and we could see the emergence of Investing super apps like IndMoney or even NeoBanks with investing and money management features like Jupiter.
Business models in the Investment Tech Space:
New Age Broker
The majority of transactions in broking take place online, even for the large legacy brokers. Low-cost brokers have upended the business over the last five to six years, taking the lion’s share of brokerage volumes. These inexpensive brokers currently account for between 50% of all active NSE customers and about 60% of the top 10 players.
It’s interesting to note that the market has experienced a startling 36.4% CAGR growth in terms of active users since 2014. Even more, growth is being seen in terms of transactions, with a 51% CAGR in the same period.
Drivers of growth in the brokerage industry:
- The younger generation is more tech-savvy and more educated on the equity markets
- The general increase in equities investing, given the tax regime and government emphasis, vs. the earlier preference for hard assets such as gold and real estate.
- The Covid-19 pandemic saw a massive surge in Demat accounts, a large portion of which was opened by young investors who preferred these discount brokers over traditional brokers
The discount broking model has created a generation of users who are attracted to the lower cost offered as well as a more user-friendly trading interface.
There is a lot of variety among new-age platforms. A common thread is the desire to become a financial product manufacturer through entry into the MF space; these players are more likely to take the passive/ETF approach, which would keep costs low, make benchmarking easier, and would not position them neck-to-neck with incumbents with strong brand positioning.
One distinction is that certain platforms, such as Zerodha, have established platforms for active traders with sophisticated tools, and others, such as Groww, are focusing on the mass segment that can be scaled up.
Even traditional mainstream brokers seem to be wanting in on the gains this industry has generated. Angel One is a prime example of this. Established as a traditional broker in 1996, Angel One (previously known as Angel Broking) has transformed into a new-age fintech platform over the years. From being a company that had an established network of over 180 branches across the country following the traditional, physical client acquisition and onboarding model and serving a client base of 0.8 million as of March 2015, the company transformed itself into a fintech platform that services more than 5 million clients today, having a footprint in 98 per cent of India’s locations.
Lines are blurring between mainstream and digital/low-cost platforms as costs converge, which may pose a concern for new-age platforms.
Advisory Tech:
Advisory Tech platforms automate the functions of what a traditional portfolio manager would do by making use of algorithms and technology. It is appropriate for mass-customized retail portfolio management as it democratizes intelligent investing in the market by giving the end user comparable advice and insights as to what a traditional portfolio manager would at a fraction of the cost.
Although Advisory Tech has been present since the 1970s in the form of Robo Advisors, it has only lately become widely used thanks to the accessibility of cutting-edge technology, affordable cloud infrastructure and low-cost internet and smartphones in the country. Most of these platforms provide automated asset allocation and rebalancing services at affordable prices. Automated investing advice, automated portfolio management, and automated retirement planning advice are the three most popular types of Advisory Tech.
The current generation of Advisory Tech startups in India adopts a sort of hybrid model when it comes to advisory services. Under the hybrid model, besides the Robo-advisor, a professional investment advisor is assigned for a few days/hours, to assist customers and give them a personalized service. In addition to managing investments, Robo-advisor services have expanded to include a variety of other financial decisions. Smallcase, Stack Finance and many others currently follow the Robo-advisor model with a much more user-friendly and intuitive interface.
Robo-advisors have also expanded beyond traditional investments. Now platforms such as Stratzy and Sensibull provide insights for intra-day trading in equities and derivatives to retail investors that were only previously affordable to the top banks and institutions.
The future of these services is now focused on being able to provide automated financial guidance across the investor lifecycle. This may include several parameters like currency hedging, asset class control and the ability to provide sectoral preference or whitelist/blacklist securities based on one’s preferences. Such platforms also offer complete DIY investment.
The major headwind for this industry however has been its inability to charge enough fees from customers to become profitable. Investors’ preference to move towards direct mutual funds, discount brokers, etc. is driving platforms to consider transitioning towards being manufacturers or brokers as well. For example, Stratzy, the Robo advisory platform for short-term trading strategies, has now become a broker themselves to monetise their customer base and turn profitable.
Some of these emerging fintech platforms have also applied for a license for mutual funds where they may offer ETF-type investment prospects. Navi is one such platform. Founded in 2018 by Sachin Bansal, formerly co-founder of Flipkart, and Ankit Agarwal, a former banker with Deutsche Bank and Bank of America, the company announced their entry into the mutual fund space by launching its ultra-low-cost index funds to disrupt the traditional players in this space.
Micro Savings Apps:
Microsavings refers to the idea of using microsavings apps like Acorn, Jar, Spenny and Tortoise to make extremely tiny investments in stocks, mutual funds, and other asset classes.
Whenever a user does a digital transaction, these platforms automatically invest the spare change in mutual funds, alternative investment assets, etc. For example, if a customer spends Rs. 392 on Amazon or their UPI apps at a merchant, the app will round it up to Rs. 400, and that difference of 8 would be automatically invested into mutual funds or other assets like gold in the case of Jar in India.
Jar launched its first gold-backed savings product in June 2021. The company currently serves over 9 million customers and clocks an average of 220,000 daily transactions. The company has raised USD 22.6 million as a part of its Series B funding round led by Tiger Global, at a valuation of USD 300 million.
Acorns, a US-based start-up, made the concept of micro-savings popular in the US and as of 2020, had over 8.2mn users and over $3bn in AUM on their platform. The company planned to go public in 2021 through Pioneer Merger Corp SPAC, but this deal was terminated as of Jan 2022 and now plans to go public via the traditional IPO route.
Given that there are 356m young Indians in the 10-24 age group, changing demographics and growing interest in mutual funds, digital gold etc. amongst them, micro-saving platforms will provide them with a good first-hand experience of investing in markets in a seamless and frictionless manner.
This has made micro-investing an attractive business model for up-and-coming investment tech businesses and that’s why we’ve seen several more early-stage startups like Spenny and Tortoise come up in this space and try to emulate Jar’s and Acorn’s success stories.
Wealth Management:
Wealth management apps allow users to get access to a single dashboard that displays their assets and liabilities. A user may save, spend, lend, and increase their money on a single platform thanks to apps like Indmoney, Jupiter etc. Additionally, these apps typically compile a variety of financial products from different financial providers, allowing users to compare different services and select the one that best suits their preferences.
These apps have a large set of use cases and can look to tap into the massive $31bn investment tech opportunity in India but may run into the same issues with monetisation and profitability that apps like PayTM have so far.
Fractional Investments:
Fractional investments enable individuals to pool funds in order to build a sizable corpus for investing in high-value assets or projects like commercial real estate, hospitality, or ventures centered on sustainability.
Fractional investing in lease-based debt models through special purpose vehicles (SPV) in real estate and long-term asset classes has grown in popularity over the last couple of years.
One such exciting startup is Wint Wealth. The company enables retail investors to invest in high-yield bonds of companies which were previously only limited to UNHIs as they had an average ticket size of Rs. 10,00,000+. Wint Wealth makes these bonds available to retail investors for as low as Rs 10,000. They do this via partnerships with NBFCs that issue these bonds. After the bonds are sold to retail investors, they receive monthly interest from the NBFCs and the full principal is returned at the end of the tenure.
Wint Wealth generates its revenue by charging NBFCs that issue the bonds on its platform around 1 to 1.5 percent of the entire transaction value it processes for them on its platform. The company currently has 30,000+ investors on its platform and raised $15mn in its last round of funding.
Another interesting startup in this space is Property Share, which has over 100,000 customers on its platform and has raised $46mn in its Series B round of funding. Property Share taps into India’s traditional love for investing in property and puts a twist on it. The platform allows multiple buyers to come together and purchase fractional ownership stakes in a residential or commercial property. The Lightspeed and BeeNext backed startup solves the problems of high ticket sizes and liquidity issues for the retail investor through fractional investing and their proprietary resale platform.
Because they make asset classes more accessible and offer higher risk-adjusted returns than conventional asset classes, fractional investing is growing in popularity as they provide pre-screened investment options and a good means of achieving general diversification. As their business models are similar to the brokerage business models where they take a % of the transaction, achieving sustainability also seems very plausible for companies in this sector thus making these companies a win-win for both users and investors in these companies, making it a very attractive business to be involved in for all stakeholders involved going forward.
What lies ahead in the Investment-tech space?
Indian investment tech startups have a very interesting decade ahead for them. With regulatory, demographic and macro trends in their favour, the following decade would be key for startups in this space to find the right product-market fit for the Indian investor and come out on top in this competitive market.
The coming decade could also see a further rise of alternative investment platforms that deal with cryptocurrencies, NFTs and everything Web 3. Once the regulatory landscape around these assets settles and these assets become mainstream in the Indian market, we could see many more startups join the ranks of CoinDCX and CoinSwitch Kuber to become Indian crypto unicorns and make Web 3 more accessible to the Indian public.
Currently, web 3 investments, for the average investor, are still seen to be very risky as retail investors have very few safety nets to protect them against defaults and frauds. A prime example of this in the Indian markets is Vauld, which is a new-age cryptocurrency wealth management and trading platform that provides fixed deposits to customers with yields up to 11%.
The Singapore-headquartered company had most of their customers and staff in India with several prominent Indian financial influencers also promoting the product. The company has currently stopped deposits and withdrawals for its user base globally after it faced a bank run like situation in June 2022 after many users began withdrawing their crypto funds from the platform following a global downturn in the crypto markets.
The company is undergoing legal proceedings in Singapore and has been granted a three-month moratorium by the High Court court in Singapore, but depositors on their platform still do not have access to their funds on Vauld and an end doesn’t seem to be in sight for them. (Source) Instances like this show the need for a better regulatory framework before crypto investments can become mainstream in India.
All in all, the investment tech landscape in India is promising in the coming decade with major opportunities to cater to the investment needs of India’s young 1.4 billion+ population who have changed their mindset toward saving and investing.