P R Dilip's article published in Asia Time Financial- Hong Kong

11th January 2024

ETFs: Bringing Investment To The Masses:

(ATF) Asset allocation, customisation, and digitalisation are the three most significant innovations to have emerged in the investment landscape in the past five decades.

Asset allocation, the concept itself, was non-existent until the 1970s as investors had few options other than conventional stocks and bonds even in the most developed financial markets.

American Investors got an additional investment avenue in the form of Index Funds, floated by American National Bank and Wells Fargo, and launched for institutional investors in 1973.

Thereafter, there was no looking back for another variety, Exchange Traded Funds (ETFs) – funds that track indexes. By 2018 ETFs had more than $6.18 trillion under management.

It is a favourite investment option for long-term investment solutions such as 401(K) accounts and Individual Retirement Accounts (IRAs) in the US and similar products in other developed markets.

Investment Guru Warren Buffett is of the opinion that index funds are a haven for savings for the later years of life. Rather than picking out individual stocks for investment, he has said, it makes more sense for the average investor to buy all of the S&P500 companies at the low cost an index fund offers.

Asset diversification

Emerging markets are also quickly catching up by launching a variety of ETFs that replicate diverse baskets of underlying assets in a cost-effective manner.

The scope of risk-diversification through appropriate such methods are widely practiced using various financial products traded in the market.

Customisation is generally a privilege, enjoyed exclusively by the top-end consumers in any domain. As the investment avenues and options widened, customisation based on clients’ risk profiles became popular across the world.

Digitisation gave birth to the new e-financial eco-system, where every paper-based asset became just a number, a unique number that is easily identifiable, effortlessly tradable, and relatively easy for safe-keeping. Financial markets began witnessing unprecedented progress, volumes of transactions grew many-fold, as did the number of participants. Innovations in financial markets became more frequent, and without much effort or delay, lesser developed markets embraced the new innovations enthusiastically.

Capital from nations with surpluses found attractive-investment-destinations in remote parts of the world where resources for development are badly needed. Geographical limitations became history for the financial markets thanks to digitisation.

Owning any financial asset from any part of the world is literally well within everyone’s reach now, thanks to the digitisation of financial assets and fintech solutions on smartphones.

P R Dilip is the founder of Impetus Arthasutra Private Limited, based in Mumbai, India.