Emerging trends in personal finance space

There was a time when females, mostly mothers, used to keep a record of items required to run the house. The budget was mostly equivalent to the income earned by the male members. A little was saved and kept aside safely. Only when some emergency occurred, the savings were used. Money lending was not organised or regulated like it is  today. Banks or other financial institutions came into play long after independence. Life was simple and involved the simplest form of monetary planning. But nothing is permanent in this world. Slowly things started changing. Money has become a very crucial source in the modern world and needs a better, far sorted planning unlike it was done before. 

Corporate finance needs tactics and no loops can be left unplanned, unchecked and unresolved. Similarly, personal finance too needs proper attention, after all it is something on which our whole life depends. As individuals we all have our own goals in life. Five years, ten years later we want to see ourselves somewhere. We tend to dream and work hard to achieve them and that involves money. Without money, nothing is possible. Earning money itself is not the solution, it is where the planning starts. Savings and investments become all the more important once you focus on spending mindfully. Handling personal finance although is not a rocket science but it surely calls for a certain approach to be adopted and followed.

There are many institutions, professionals and technology to handle the most complex kind of challenges when it comes to finance.

We are living in a world where a lot of dependence already exists on technology. And technology has done wonders in almost all the sectors of life. Our aim is to learn about the latest concepts that may have a greater deal of influence on personal finance matters. Personal finance includes banking, insurance, retirement planning and a lot more. The trends in personal finance keep on changing and you may like to get introduced to these emerging trends. The most relevant ones have been explained in detail here:

• Exchange traded Funds-This class of assets has grown remarkably in the recent past. It is an emerging trend and SEBI is yet to give its nod to both the domestic and overseas ETFs. It is expected that the regulations are likely to enhance the scope for innovation in the existing schemes. The total assets under this category went up from Rs. 2,30,000 crore to Rs. 3,64,000 crore during November 2020 to November 2021. ETFs are funds that track indexes such as CNX Nifty or BSE Sensex etc. An ETF trades like a common stock on a stock exchange. They are bought and sold through a registered broker of a recognized stock exchange. They cannot be bought and sold like an open ended equity fund. At present there are 17 schemes in the debt category with Rs. 50,000 crore underlying assets. The investors who are able to manage the digital platforms find ETFs comfortable. The popular ETF categories are as under, however the Indian ETF scenario is changing rapidly and will include those ETFs in its basket too, which are not currently available.

1. Index ETF: This is the most common of all ETFs with an aim to track a particular market index like Sensex, Nifty 100 etc. By investing in an Index ETF an investor gets an exact amount of the index returns that the ETF is tracking.
2. Bank ETF:They invest in banking stocks listed on the stock exchanges.
3. Gold ETF: Gold ETF is an exchange traded fund that aims to track the price of gold in the market and has the similar value of pure 24 carat physical gold. Thus, Gold can be bought in the form of Gold ETF.
4. Liquid ETF: Liquid ETFs invest in short term government securities, call money or money market instruments of short term maturities. Liquid ETFs are meant for return maximisation while keeping the price risk at the minimum level.
5. International ETFs: This category of ETF invests in foreign based securities primarily. International ETFs track a country specific benchmark index or global markets. Those who want to invest in foreign securities, International ETFs are a good option for them.

Why ETFs?

1. ETFs are the most simple, investible options without worrying about the fund’s past performance. They track the index and there is no need to have any understanding about the fund’s investment pattern or the returns given by it during various market cycles. Majority of ETFs track the large cap indices. One you select an index based ETF, you know what exactly it is tracking and how much return you can expect to receive from it. The weight of underperformers is reduced in the index portfolio.
2. Performance of any mutual fund scheme depends upon the fund manager’s experience, AMC’s track record and so on. To outperform peers or the market demands a lot of expertise on the part of the fund. Since Exchange Traded Funds track the benchmark index and leave a little scope for under or outperformance. ETFs ensure Index returns for your money.
3. Expense ratios of ETFs tend to be lower than other mutual funds. Usually the cost is as low as 0.25%. Other mutual fund categories have an expense ratio in the range of 1.5% to 2.25%.
4. ETFs face systematic risk. They are subjected to market risks. Mutual funds have some unsystematic risk meaning company specific risk as the money is invested in a portfolio comprising various stocks belonging to different sectors. ETFs do not have any unsystematic risk as they are focussed on tracking the benchmark index. They invest 95% of its total assets in securities of the index that they track.

How to select ETFs and Index Funds?

• You can look at their Total Expense Ratio. A lower total expense ratio is better as it predicts risk free profits.
• Tracking error depicts the deviation between index return and the ETF return.
• And liquidity is also an important aspect because ETFs are bought and sold in the stock exchanges. An illiquid ETF will face difficulty in finding buyers when you want to sell them.

Disadvantages of ETFs

1. One of the biggest disadvantages of ETFs is that they trade like stocks. A typical mutual fund can be purchased even after market hours. In India they are not popular and lack liquidity.
2. A commission needs to be paid each time of buying and selling ETF units.
3. Trading fees add up and reduce the overall returns. No-load mutual funds can be sold without commission or sales charge.
4. If you want to re-invest dividends then an additional brokerage needs to be paid.
5. SIP does not serve as a good option in this type of funds.
6. Indian investors do not prefer ETFs and lack the knowledge about their functionality. One of the reasons is that in terms of performance ETFs leg behind the normal mutual funds. Even pension funds and insurers are not ready to take the ETF route.

Once the transparency comes through regulations, this sector will see a growth in the coming years. It has the potential to grow if it is open to institutional investors as well.

• BUY NOW PAY LATER: Another emerging trend revolves around BNPL. In simple words it means, you can purchase whatever you want to and pay in interest free instalments later. It is a facility whereby you can make a purchase without paying from your own pocket on the spot. However, you have to repay the amount in instalments within a prescribed time. 

Digital payment solutions have become more influential. Those can be done by using mobile without worrying about any security concerns. Both the consumers and businesses find the technology based systems more useful.

More and more retailers and financial institutions are offering Buy Now, Pay Later. The Millennial and Gen Z shoppers find them attractive. This platform typically does not charge interest and is often easier to get approved for than traditional credit cards or other lines of credit. Banks also offer the same features on their debit cards. The payback period ranges from 3 to 6 months. Once the KYC requirement is fulfilled, it does not ask for any prior credit history or a credit score. If a customer decides to opt for it, it can be approved within a few minutes or hours.

E-commerce apps give you such options. BNPL options can be found on food delivery, travel booking, grocery and other essential delivery platforms as well. These small ticket loans allow online and offline purchases. The payment can be made in a lump sum amount of no-cost EMIs, thus making it affordable.

A lot of paperwork and documentation can be avoided along with credit score requirements by using BNPL. But still read the fine print before using this platform and understanding what can happen if the payment is missed.

Who are the providers of BNPL in India?

Fintech companies and startups act as a major contributor in this sector. The most known fintech names are BharatPe(postpe), HDFC Bank’s FlexiPay and ICICI Bank’s PayLater. Amongst start ups are Lazypay, Simpl, ZestMoney, FlexMoney, ePayLater,Ola Money Postpaid etc. Pay Later options are offered by Amazon, Paytm and Flipkart as well.

The Mechanism of BNPL: The operational model is mostly the same with a few changes in the terms and conditions by BNPL service providers. You can simply make a purchase at a participating retailer. Opt for the ‘Buy Now, Pay Later’ option. Then make a small down payment of the total purchase amount and the rest shall be paid in a series of interest-free EMIs via cheques, bank account, bank transfer, credit/debit card. Consumers have to pay interest on BNPL but it depends upon many factors. Usually if you pay within the credit free period, then there shall not be any interest liability. Failure to make timely payment affects your credit score, and the BNPL facility in future gets suspended or it is available only by paying a very high rate of interest.

The reasons behind the popularity of BNPL

Apparently due to the following advantages, it is getting popular-

1. Young population finds this option very lucrative. Those who do not have credit cards, are able to use this option as they do not have to bother about the credit history or credit scores before getting this kind of short term finance. It is expected that India is going to be one of the fastest growing markets because of its demographics and high youth population percentage. By 2024, the e-commerce space is likely to grow to 9% from 3% in 2020.
2. BNPL is very easy to use. It is the most convenient way to get a loan. By completing KYC and knowing your spending limit, you can start shopping. Anyone above 18 years can avail of these benefits. The customer’s data, their KYC and bank statements etc becomes the responsibility of the lender.
3. Anybody who is eligible based on their annual income and credit score can use the credit cards to get short term finance. You need to have an income above a threshold limit. However, BNPL does not need any such condition for allowing small-sized loans. Traditional credit card underwriting does not allow those who do have any credit score and so they lack the facility.
4. BNPL does not have riders like joining fees in case of many credit cards. There is no processing fee for joining. Late payment fees and pre closure charges are applicable in case of BNPL.
5. Credit cards allow an interest free credit period of up to 45 days. BNPL providers usually give 15 days credit and it may extend to an interest free period of three months.
6. Credit cards may make one fall in a debt trap. Youth likes Pay Later options as they are more transparent and are totally free for consumers who pay on time. Credit cards run on OTPs and payment failures happen. So while buying online, what consumers want is a seamless experience.
7. Interest rates could be as high as 48% in case of credit cards and they are fixed rates of interest. BNPL charges a maximum upto 24% rate of interest and it varies depending upon other factors.
8. Any Indian resident residing in a tier 1 or tier 2 city who is above 18 years of age can use this facility. The maximum age can be upto 55 years in a few cases. You can choose the repayment tenure.

Disadvantages:

1. There is a limit on the amount which one may get by way of credit. The credit ranges from Rs. 2000 to Rs. 1 lakh. If a consumer uses a credit card, he may not face any limits if his credit history is sound.
2. It drives a consumer to get indulged in impulsive shopping. Since there is no limit on what you spend, you may break the credit limits and such a buying habit becomes really tricky as it drags you to spend more than what you should.
3. The amount lent is interest free but there is always a limit upto which you can get the credit. If the repayment is not made within the stipulated time, you shall be charged a high late payment fee. The lender or provider deducts the charge for late payment from your account through the auto deduct system. It can have an impact on your credit score.
4. The most important drawback of all is that this platform is not universally accepted. Credit cards have an upper hand when it comes to popularity.

The pandemic has propelled its adoption globally. India is a largely populated country with a credit-averse population. Some of the major players in BNPL with the highest expected growth potential are in India and this platform is set to surge over ten-fold within four years. The users may rise and reach between 80 to 100 million customers by then from 10 to 15 million currently.

• Neobanks: A neobank is an online bank, internet-only bank, a virtual/digital bank which does not require traditional branch networks. Neobanks are taking over the fintech industry globally. Such banks are not physically present at any specific location. Neobanking is entirely online. Their bank partners provide them licensed services though otherwise they do not have a bank licence of their own. 

At an annual average rate (CAGR) of 47.7%, they will be valued at around $722.6 billion in 2028.

Popular Neobanks in India are: Jupiter, Niyo, Fi Money, ZikZuk, OcareNeo, Kotak 811, Open, RazorpayX, Finin, InstantPay, Digibank, North Loop. Freo is India’s first Credit led Neobank. All these banks function through apps that can be accessed through a smartphone. 

The reasons behind their popularity:

1. They provide 24/7 customer service, and ensure instant banking.
2. They are very convenient, quick and offer cross-border financial services. You can open an account in just 10 minutes. You will also get a virtual debit card for immediate use.
3. Due to lesser human interaction, these banks can avoid many human errors.
4. Because of their ‘online’ feature they are highly streamlined and free of many practical hassles.
5. They are cost effective and their future looks sound.
6. These banks allow many benefits and rewards.
7. They require minimum paperwork, transaction fees and unlike traditional banks they are borderless.
8. They are known as challenger banks as they have changed the traditional banking model with a tech-driven alternative mode of banking.
9. You get the flexibility to travel anywhere in the world without carrying cash with you.
10. Consumers are allowed access to global investment opportunities, easy international student banking and low-cost global spending. Moreover there is no account opening fees, monthly fees, wire fees or minimum balance requirement is mandated.
11. Just by using your mobile app you can manage your deposits, loans, debits and credits. Consumers get a personalised service experience. It is truly a one-stop-shop for availing efficient banking facilities at minimal operating costs.

Again, Indian markets are witnessing the smartphone penetration to a greater extent and it is predicted to grow manifold in the coming years. The high end consumers who prefer a seamless experience, underbanked customers who do not get an easy access to quality banking and customers with special needs like freelancers, drivers etc. may find such banks very useful to manage their short term finance needs and cashflow. Younger generations like to use neobanks due to their simplicity and modernity, tailored financial solutions, good savings rates etc.

Despite of the above apparent benefits that neobanks tend to offer, the following are sighted as drawbacks of Neobanking-

1. Those who have almost zero or very less knowledge of technology cannot use neobanks. The customers who are tech-friendly find them attractive.
2. As these are not legally recognized banks, the customers do not have legal remedies to resort to if they have a problem with an app, services or non-regulated third party service providers. It is difficult to find anyone accountable when there is a dispute.
3. Now that all the banks have their apps, they allow online operations or net banking and an easy access to ATMs everywhere, neobanks may not be a suitable option for those who are already using these features.
4. There are clients who would like to speak to a representative and avoid something that is totally automated. When there is a complicated transaction, consumers may find it easier to talk to some assistant rather than using an app which does not have any explanation for it.

• Auto/Robo advisory

Robo advisors often provide instant advice concerning personal finance. A Robo advisor is nothing but software that uses complicated computer algorithms to administer your investment portfolio. They might be completely automated or operate with human assistance. The main features of auto/robo advisory are the following:

1. They provide emotion-free, best algorithm based advice.
2. The plus side is that they are low cost and do not require any minimum balance.
3. In the field of research based economics, these algorithms have won Nobel-Prize which proves their adaptability.
4. Auto advisors are the most popular way to get access to the markets.
5. At times, the traditional financial advisors themselves use the robo advisors to do the filtration of their job and they invest their time more with the clients for the tasks that need human intervention.
6. Youth that has lower net worth might not be interested in hiring professional advisors. The robo advisors can be of great help to them.
7. Robo advisors are suitable for different types of clients. Depending upon the clients’ interest in a particular investment scheme or sector based investment, they can also be broadly classified into different portfolios.

The main drawbacks of auto advisors are,

1. They do not allow any flexibility and lack human interaction.
2. They are not hundred percent personalised. The way a financial planner interacts and integrates all your financial aspects, cannot be expected from the auto advisors. There are matters which are beyond money concerns.
3. There are professional advisors that offer affordable services. They cater to clients’ needs at a low cost and are able to replace the robo advisors with ease.

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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