In India, simple instruments have delivered on client expectations. Sometimes, there are wealth management outfits that create complex products to quench the thirst of commissions. After 15 years of innovations on Private Equity, Alternative Investment Funds, Alternate Funds, IPOs, Pre-IPO Funds, which started in 2006 has resulted in 10-12 years of good data and on analysing this data, we have understood what has gone wrong. Simple Mutual Funds, for the same period, has delivered 17%-18% and clients are happy with consistent returns of 14%-15%. So, you have to keep innovating sometimes to keep the business simple. Innovation is necessary when you are expanding; but, if you are only focusing on client returns, and when the client is happy with 12% returns; but if you are still innovating, when the simplest products are giving 14%-15% returns.
If you want to bring an instrument which is innovative, then it has to be complimentary solution. The Plan A can be Mutual Funds, and if that fails, then what is the Plan B? If there is a thought-process for a Plan B, then even if you go wrong with Plan A, there is a back-up Plan B. For example, if you go to a hotel and do not get a reservation, then you go to another one where you will get a reservation. The reality is that most investments are designed by managers thinking that the advisor will always go right. It is not going to be that way because there are going to be many newspapers which are going to lead the market in several directions. Therefore, for a certain portion of your money, you will have to assume that if the advisor goes wrong, what is the Plan B put into place to ensure there is balance and not capital loss. That’s where we introduced Structured Products after a large debate!
We are one of the largest gross mobilisers of Structured Products. These products are such that, for example, Nifty delivers only 2% a year, and does not deliver the expected 10%-15% a year, you still make 14% per annum. In Structured Products, we use the combination of a debt instrument and a derivative instrument, combined in a certain proportion gives you this pay-off. It may look startling enough, but in a high interest economy and a high volatility economy like India, if you get these two inputs to a treasury manager or trader, who creates this product, then you can get 14% return on a Nifty movement of 2%. The drawback is only 14% but it is a good quality return. If the market is run by the bulls, like you had from 2003-2007, then Mutual Funds will do the trick for you, otherwise Structured Products will come to the rescue!