Regulated vs. Unregulated Investment Products (India)

As retail investors we have many investment options today, common ones such as stocks, MFs, rental income, etc., and newer ones such as P2P lending, angel investing, digital gold, etc.

However, not all products and companies selling those products are regulated i.e. do not have oversight of regulators such as the RBI and SEBI. While not all unregulated investment products are unsafe, they are more prone to fraud and losses.

In this article, we are going to discuss - 

What are regulated Investments and their different types?

What is regulated investment?

A regulated investment refers to an investment product or vehicle that is subject to oversight and regulation by government authorities or regulatory bodies. The aim of regulating investments is to protect investors from fraud, manipulation, and other risks associated with investing while also checking the credibility of those operating the investment vehicle or company

Different types of regulated investments

🔵Securities: This category includes stocks, bonds, options, and other financial instruments traded on regulated exchanges such as stock markets. Securities are typically subject to regulation by government agencies such as the Securities and Exchange Board or India (SEBI) in India or the Securities and Exchange Commission  (SEC) in the United States.

🔵Mutual Funds: These are investment funds that pool money from multiple investors to invest in a diversified portfolio of securities such as stocks, bonds, or other assets. Mutual funds in India are regulated by SEBI.  

🔵Exchange-Traded Funds (ETFs): ETFs are investment funds that are traded on stock exchanges, similar to individual stocks. They typically track an index, commodity, or basket of assets and are subject to regulation to ensure compliance with securities laws and investor protection measures. Like stocks, these are also regulated by SEBI.

🔵Peer-to-Peer Lending: Platforms that facilitate peer-to-peer lending in India are regulated by the Reserve Bank of India (RBI) and must be certified as a Non-Banking Financial Company - P2P by the regulator before commencing operations. This investment category is regulated by the RBI and not SEBI as RBI oversees all lending activities and products in the country. 

🔵Real Estate Investment Trusts (REITs): REITs are investment vehicles that invest in income-generating real estate properties. They are subject to SEBI regulation to ensure compliance with securities laws and investor protection measures.

Regulatory requirements for regulated investments vary depending on the jurisdiction and the type of investment. Regulatory bodies typically oversee aspects such as registration, disclosure, reporting, advertising, and investor protection to maintain the integrity and stability of financial markets and protect investors' interests.

What are unregulated Investments and their different types?

What is unregulated investment?

An unregulated investment refers to an investment product or vehicle that is not subject to oversight and regulation by government authorities or regulatory bodies. Unlike regulated investments, which are subject to strict regulatory requirements aimed at protecting investors and maintaining the integrity of financial markets, unregulated investments operate outside of these regulatory frameworks. 

Different types of unregulated investments

🔵Private Placements: Investments in private companies or offerings that are not registered with securities regulators. These investments often involve higher risk and may not offer the same level of investor protection as regulated securities.

🔵Cryptocurrencies and Initial Coin Offerings (ICOs): Digital currencies like Bitcoin and Ethereum, as well as ICOs, which involve the issuance of digital tokens or coins by blockchain-based projects. While some jurisdictions have implemented regulations for cryptocurrencies and ICOs, the regulatory landscape remains fragmented and often less stringent compared to traditional financial markets.

🔵Certain Hedge Funds and Private Equity Funds: Some hedge funds and private equity funds may operate in jurisdictions or structures that allow them to avoid certain regulatory requirements. These funds may target sophisticated or accredited investors and offer investment opportunities with fewer regulatory constraints.

🔵Certain Real Estate Investments: Certain real estate investment opportunities, such as direct investments in properties or real estate partnerships, may operate without significant regulatory oversight, particularly if they are structured in a way that falls outside of securities regulations.

🔵Digital Gold: Digital gold enables customers to purchase gold electronically, with a corresponding amount securely stored in insured vaults to back the digital holdings. This ensures price parity between physical and digital gold. Although, It has also become one of the frequent choices of investment, it is still unregulated. The absence of regulatory oversight in digital gold leaves it vulnerable to unethical practices. 

Learn  What Is Diversification? Why diversifying your investment portfolio is the best strategy?

It's important to note that while unregulated investments may offer potential for higher returns, they also carry higher levels of risk due to the lack of regulatory oversight and investor protections. Investors considering unregulated investments should conduct thorough due diligence, understand the associated risks, and consider seeking advice from financial professionals before committing capital. 

Additionally, regulatory authorities often caution investors about the risks associated with unregulated investments and may issue warnings or guidance to help investors make informed decisions.