Making sense of the rapidly evolving Indian wealthtech landscape
Behind yesterday, catching up quickly today, and building for tomorrow.
Retail investing exploded during the pandemic. Suddenly, people were stuck at home with a lot of time and nothing to do, so they turned to the markets for entertainment. Bloomberg opinion writer Matt Levine calls this the Boredom Markets Hypothesis: “The boredom markets hypothesis says that people will buy stocks when buying stocks is more fun than other things they could be doing for fun.”
There is some (/ a lot) of truth to this. What added fuel to the fire was that people who started investing for the first time at the start of the pandemic ended up doing exceptionally well. The S&P 500, a gauge of the US equity market, doubled from its pandemic induced bottom in less than one year - the fastest doubling from a trough since WWII! We have seen a similar story in the Indian market too. The BSE Sensex, an index comprised of the 30 most prominent listed companies in India, has rallied more than 120% since March 2020 to make new all-time highs.
This explosion has brought wealthtech to the forefront globally. The new flock of retail investors is demanding 1) better tools, 2) a more social investing experience, and 3) new types of securities in which to invest. Companies that deliver on these demands are seeing fast adoption and even faster funding. Robinhood, an American startup that pioneered gamified, commission-free trading with its app launched in 2015, took advantage of this sentiment to IPO at a valuation north of $30B. Titan, another US startup democratizing access to hedge fund quality active management, just raised $58m from Andreessen Horowitz at a $450m valuation. Public.com, an ‘investing social network,’ raised $220m at a $1.2b valuation a few months ago.
India is no different: Discount brokerages like Zerodha, Upstox, and Groww are stealing massive market share from incumbents. In fact, Zerodha and Upstox are now the two biggest brokers in the country, racing ahead of ICICI Securities and HDFC Securities. Groww just raised $83m from a group of investors at a valuation greater than $1b in April. Smallcase, a platform that lets you invest in baskets of stocks put together by professional managers, recently raised $40m from a group that included global e-commerce giant Amazon. In addition, multiple startups have popped up that let you invest with friends - flowclub allows you to do so with real money, while StockGro is an FPL-style league that lets you ‘invest’ without deploying capital.
The Indian wealth landscape is now vast and changing quickly; I will help make sense of it by covering:
India today.
What excites me about India tomorrow.
How startups should think about the consumer as they build for the future.
We have some catching up to do
The Indian equity market is highly underpenetrated. Only 2-3% of Indians invest in equities, which make up ~4% of Indian household wealth. Here’s what that looks like vs. the rest of the world:
Indians prefer 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 aren’t participating in wealth creation via the public equity markets.
The average American, on the other hand, has an entirely different approach to investing. 32% of all US household assets are invested in equities, only 24% in property, and none in gold. It’s 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 five times the size of ours.
By any metric, India has a lot of catching up to do.
However, there are reasons to be optimistic
This gap is a fantastic opportunity. 2021 is the time to be building in wealthtech in India, especially if you’re disrupting legacy institutions. Things are changing at an astounding pace. And although there’s a lot of work to be done in terms of sheer numbers, India will start to close the gap technologically, and timelines of adoption cycles will get far shorter.
Things that took ten years to adopt in the US will take half the time here. Here are a few exciting themes that stand out and the companies driving them:
Discount brokerages: Companies like Zerodha, Upstox, and Groww are driving trading costs down and providing better tech infrastructure, making it easier and cheaper for consumers to trade and invest.
Direct mutual funds: Groww, Kuvera, and Upstox are making it easier and cheaper to access Mutual Funds. They are also driving a shift from Regular MFs (invest through a distributor for a commission) to Direct MFs (invest directly with the fund house, for free), saving the consumer up to 1% a year on all their invested assets.
Passive investing: Zerodha, Navi, and Groww will do the heavy lifting of educating the consumer on the benefits of passive investing. They’ve all applied for AMC licenses to launch suites of passive products and are finally incentivized to do what the traditional AMCs have been neglecting for years now.
Democratize, democratize, democratize: Investors are increasingly demanding products hitherto offered only to HNIs. Startups like hBits are improving access to commercial real estate by reducing ticket sizes and offering digital platforms; Smallcase allows everyday investors to trade alongside PMS-quality fund managers; platforms like AngelList now allow investments in early-stage startups in much smaller ticket sizes.
Socialize and gamify: There has been an explosion of investing and trading communities for every niche. Discord, Whatsapp, and Telegram all have 100s of groups dedicated to the topics, where you can get advice either from friends or anonymous traders. Companies like flowclub are now adding structure to the madness, letting you follow friends and track how their portfolios are doing. StockGro takes another approach, allowing you to trade stocks without investing any capital, competing against friends for cash prizes for the most successful trading strategies.
Reduce barriers to entry: ‘Round up’ investing apps are doing an excellent job of reducing the friction into the market by making the process automatic and less intimidating (smaller amounts, spare change, less risk). Jar is doing this with digital gold, Spenny with mutual funds.
UPI as an ecosystem: UPI infrastructure has catapulted India into one of the fastest-growing digital economies globally. Now, UPI-based payment companies are using that same infrastructure even to allow users to invest in the markets. Alright, maybe encouraging retail frenzy buying of IPOs via UPI is not the healthiest way to go about it, but I firmly believe that all-in-all more people in the market is better than fewer people in the market.
In fact, there’s so much going on that to make sense of it all it’ll help to understand the Indian investor in more detail.
The Indian wealth distribution
Here are some not so fun stats about the Indian wealth distribution:
The top 1% own 40% of national wealth.
The following 9% own 37% of national wealth.
The bottom 90% own only 23% of national wealth.
Let’s take a second to look at that distribution:
The 13m richest people own 40% of national wealth.
The next 120m richest people own 37% of national wealth.
The poorest 1.2b people own only 23% of national wealth.
Because of the drastic inequality, the economics of wealth management look different for each group, and consequently, so do the solutions. For the scope of this article, we will focus on solutions for the top 1% and next 9% only.
The top ~1%
This group owns 40% of the wealth in the country. Legacy wealth management firms service these customers using personal relationship managers (RMs). The size of their holdings affords them cross-asset portfolios with various products like mutual funds, portfolio management services, private equity, venture capital, private debt, etc.
They make high-level decisions on the structure of their portfolios, but usually don’t get involved in the day-to-day. They certainly don’t want to bother with admin and execution, and so are unlikely to use DIY products. Some might use digital products out of curiosity or interest, or to complement their traditional wealth management offering.
These RM-client relationships are hands-on and include a whole range of offerings: asset allocation, portfolio management, access to fund managers, tickets to an IPL game, estate planning, you name it.
Solutions in this group focus on:
A hands-on relationship that makes the customer feel special.
Alternative investment opportunities that the rest of the market can’t access, like shares in an exclusive startup or an investment in private debt.
Providing access - this may include one-on-one’s with high profile fund managers, events with exclusive speakers, or tickets to your favorite play.
Estate planning - handling the complex issues involved in family wealth planning.
In fact, for this segment, actual investment advice is almost an afterthought. You’re really paying for everything else.
The next ~9%
Traditional wealth management economics don’t make sense for this group. Ticket sizes are smaller, and the ARPU (average revenue per user) doesn’t justify high-touch one-on-one relationships. This is where most of the Indian wealthtech sector is focusing its efforts. They have 3 main investing styles:
Active and DIY investors - they are eager to learn, want a say in what they’re investing in, and enjoy the feeling of control that comes with active investing.
Passive investors - they have dabbled in a few mutual funds, understand that participation in equity markets is the path to long-term wealth creation, but want a simple solution that gets the job done for them. They either don’t want to or aren’t equipped to make investment decisions themselves.
The uninitiated - they prefer tangible assets that they understand like gold, FDs, and real estate. They think of equities are foreign and risky and prefer to stick to what they know.
My masterpiece below helps put these groups in perspective, along with the solutions that cater to each of them:
Active and DIY investors
This group falls into the top right quadrant of the graph. They are eager to learn, want a say in their investment decisions, and want to feel like they’re in control.
This segment has expanded rapidly over the past couple of years, driven in large part by the pandemic.
A lot of the new startups that have sprouted up in the Indian wealthtech space cater to this engaged, active, demanding group of investors.
Companies building for this space should focus on:
Tools for the ‘professional’ DIY trader - Zerodha was the pioneer here and built an exceptional business catering specifically to this (profitable) segment.
Community - Capitalmind is a great example of an engaged active investing community that has built a product offering around it.
Tech that enables choice and optionality - Groww, Upstox, Zerodha, and Kuvera all allow you to choose from a broad offering at a low cost. Smallcase even allows you to invest in themes and alongside professional fund managers.
The social aspect to investing - flowclub and StockGro both offer different versions of a social investing experience.
Winners have been crowned here in discount brokerage (Zerodha), direct mutual fund investment (Groww), and thematic investing (Smallcase), but there is still room for innovation. Social investing is in its very early stages, and I’m excited to see how this space evolves. Making investing more approachable is a great way to bring the uninitiated into the markets too.
Passive investors
These investors sit in the bottom right quadrant. They have the disposable income to invest and understand that equity markets are the path to long-term wealth creation, but are overwhelmed by the available options and information. They don’t know who to trust or where to begin and aren’t serviced by the existing wealth management industry. They don’t really want to spend the time to understand the entire space from scratch, but also don’t want to make decisions based on incomplete information. And because of that, this group remains underinvested.
Ironically, for this set of investors, with investable assets between 2lac and 1cr, investing doesn’t have to be complex.
A diversified portfolio of index funds that is rebalanced periodically can give them a 95th percentile outcome with a 10th percentile amount of effort. But that’s a difficult message to grasp when the entire ecosystem has convinced them that investing needs to be complex.
Solutions for this group should have the following features:
A simple, single product offering.
Reduce decision fatigue by taking away options and telling the customer exactly what to invest in.
Feel tailored to an investor’s specific needs.
Have a human touch.
Scripbox was a pioneer in this segment. It started out as a mutual fund roboadvisor (roboadvisors are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision) in 2012, before anyone was even thinking of automated advisory or digital mutual fund investment.
Orowealth, founded in 2015, also provides a version of roboadvisory, but that isn’t its core offering.
IND wealth, a newer startup funded by Tiger Global, is taking a different approach as it targets this customer. It is attempting to become the single destination for all things personal-finance-related by creating the ‘super money app.’ As part of this offering, it also provides personalized, tiered, human wealth advisory at scale. Whether this model will be successful is yet to be seen. Even with all this innovation though, the space still remains underserved.
I believe the solution probably lies in a hybrid advisory model. A financial advisor’s job predominantly consists of the following:
Determine a customer’s goals, investment horizon, and risk tolerance.
Choose which assets classes are appropriate for the portfolio.
Select the instruments through which to invest in those asset classes.
Determine the allocation to those instruments based on the customer’s profile.
Execute the trades, rebalance the portfolio periodically, and provide monthly reports.
Thanks to technology and research, most of that job can now be automated. In fact, the advisor’s main role will be to assure the customer that they’re making the right decisions. This doesn’t require a one on one daily relationship. A periodic check-in will suffice, allowing for a much smaller team of advisors, a lighter cost structure, and a more scalable business model.
The uninitiated
This group lies in the bottom left quadrant of our graph. They (especially) prefer tangible assets and FDs to financial investments. They associate the markets with the risk of capital loss and feel like they need to learn a lot more before they’d even consider participating.
For this set, solutions need to focus on reducing the friction into the markets. Some ways of doing that include:
Round up or top up apps - these apps follow the Acorns model from the US of rounding up and micro-investing every time you spend. For example, say you spend Rs. 323 on a late-night Zomato order. An app called Jar lets you round up to the nearest Rs. 10 (to Rs. 330) and invest that difference (Rs. 7) into digital gold. Spenny lets you do the same thing and invest in mutual funds.
Stock back credit cards - Stash, an American company, allows you to get paid back on your credit card purchase in stock instead of cash. I’d be surprised if we don’t see 2-3 similar companies in India over the next 12 months.
Investing through UPI apps - There are ~500m+ registered UPI users, and more than 200m who actively use the infrastructure for payments monthly. PhonePe, Google Pay, and Paytm together account for more than 90% of the market share in the space. These players are now moving into investing and offer investments in MFs, FDs, and digital gold. Their distribution alone will help bring people into the market that never would have considered it before, just out of sheer access and convenience.
It is still early days in this segment. The players that succeed here will have the best shot at the ‘next 100m’ and the 100m after that. And they will do so by automating the investing process and making it less intimidating by using smaller amounts. Once a user has money on the line, they will become more engaged, easier to educate, and likelier to graduate to more significant investments.
India wealthtech will be a positive-sum game over the next decade
At the current pace of innovation, I’m optimistic that India will start to close the wealthtech gap with our developed peers. The Indian wealthtech market is expected to grow more than 3x in five years from $20b in 2020 to $63b by 2025. I think that number is too conservative. With companies using technology to scale the right solutions for the right segments, we could move the needle on the portion of household wealth that is invested in equities from 4% to 8% by 2025. This will bring $1T in additional investment into the equity markets over the next five years.
Startups should be clear about what type of consumer they are targeting as they build, and recognize that different segments have drastically different needs:
More sophisticated tools, a broader selection of products, engaging communities, and social experiences will draw more active investors into the fray.
More holistic solutions that put wealth creation on autopilot using scalable automation with a human touch will make the passive group more comfortable investing a greater portion of their savings in the market.
Solutions that make investing less intimidating using smaller ticket sizes and automated processes will help first-time investors take the plunge, and serve as an on-ramp even for the next 100m (and the 100m after that).
There is room for several players to coexist in this ecosystem. Partnerships will blossom, as some companies build new solutions on top of existing infrastructure and others serve as customer acquisition funnels for incumbents. Most consumers will use a combination of platforms to get the job done as they pass between different groups. 2019-2020 were revolutionary years for retail investing, and now the next decade will see many winners in wealthtech. 2021 is an exciting time to be building.
Excellent read. Thanks for sharing.
Great read! Congrats!