In the second part of an interview, Siddhartha Rastogi, director, Ambit Private Wealth, talks about investors' preferences and the future of the Indian market for structured products.

Most Indian investors prefer three-year structures which are capitally protected, according to Rastogi. "The main reason people enter the market for structured products in India is either to get more yield or the equity participation with downside protection," he said. "In both of these scenarios, investors would want to have their capital protected and they would want to have some participation under the Indian economy."

According to Rastogi, considering the preferences of the Indian investors, in the next few months there will be a strong increase in the demand for Nifty-linked capital protected debentures and digital structures on the fixed income side with this kind of short to medium term investment terms. "These are the two preferred forms which I see people participating in the structured products market here in India," he said.

Capital protection is one of the strongest reasons why people invest in structured products, according to Rastogi, who points that educated investors that understand the functioning of these products, truly "believe that this kind of product can give them downside protection and they can have participation on the Nifty side".

"Additionally, the lack of alternatives beyond equities in the Indian market also influences positively the structured products industry in the region," said Rastogi. "Yield has fallen, gold has been moving pretty much sideways, so Indian investors are left with limited choice beyond equity investing and structures which can give them better yield or capital protection."

The recurring low interest rates environment is also helping the influx of money into structured products, according to Rastogi. "Consequently, the financialization of the economy is stimulating the structured products [market] in the country," said Rastogi.

Rastogi believes that regulatory challenges in the structured products market have been fueled by limited education from the manufacturer, a handful of plain products and only selected clients who understand how the market functions.

"Most of the people are not able to efficiently price the structures so that to get the desired liquidity," said Rastogi. "The lack of adequate liquidity is the reason most retail clients are not interested in participating in these structure. At the same time, the liquidity premium is another hydrant from the retail side to participate in the structures."

Going forward, Rastogi expects a 30% to 35% growth over the next twelve months due to the size of the equity market and the benign interest rates context.

"More and more people are getting educated [on the use of] structured products and that is only going to deepen the investing opportunity," said Rastogi, adding that the structured products market in India will follow the lead of the mutual funds financial industry.

"In the last 15 months, there has been a point of inflection and the mutual funds industry grew significantly because of the sheer education about mutual funds," said Rastogi. "This is what is going to happen in the structured products market in the next three or four years when the retail investors become much more sophisticated and they understand the underlying risks and appreciate the returns which come out of the structured products."

According to Rastogi, the only thing stopping the market from growing is the education of the Indian retail investors. "Once that education spreads out, you would see far higher and far deeper participation in the structured products space," said Rastogi.

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Lack of alternatives makes structured products attractive in India, Ambit (Part 1)

The time for innovation and education in India, Ambit

Indian investors prefer stocks and leverage, Edelweiss