FinTech: GrowFix & its mission to unlock high return fixed asset investment for retail investors
Offering consistent pre-tax returns of 11% through covered bonds, GrowFix wants to democratize access of assets that are only available to HNIs/Ultra-rich today.
Key Terms:
NBFCs: Non-Banking Financial Companies (NBFCs), are entities that provide certain bank-like and financial services but do not hold a banking license. NBFCs are not subject to the banking regulations and oversight by federal and state authorities adhered to by traditional banks.
Covered Bonds: A covered bond is a bond issued by a bank or an NBFC backed by a pool of loans that can be liquidated in case the bank/NBFC goes bankrupt.
Debt Mutual Fund: A debt mutual fund (also known as a fixed-income fund) invests a significant portion of your money in fixed-income securities like government securities & corporate bonds.
Fixed Deposit: In a Fixed Deposit, you put a lump sum in your bank for a fixed tenure at an agreed rate of interest. At the end of the tenure, you receive the amount you have invested plus compound interest.
Liquidity: Liquidity refers to the ease with which an asset, can be converted into ready cash without affecting its market price.
Liquidity Risk: This refers to the risk of not being able to convert particular securities like equity shares & bonds to cash.
Credit Risk: This refers to the risk of a borrower failing to make repayments or upholding contractual obligations.
Demat Account: It is an account that is used to hold shares and securities in electronic format.
CAC: It can be calculated by simply dividing all the costs spent on acquiring more customers (marketing expenses) by the number of customers acquired in the period the money was spent. For example, if a company spent $100 on marketing in a year and acquired 100 customers in the same year, their CAC is $1.00.
LTV: Life Time Value or LTV is an estimate of the average revenue that a customer will generate throughout their lifespan as a customer.
Let’s say you fall in the 30% Tax Bracket i.e. earning more than 10 lakh Rs per annum. Where would you invest your money? Mutual Funds, Stock Market and FDs, right?
What if we tell you there could be a better advice than Mutual Funds Sahi Hai or Stock Market Mein Lagao?
Stocks & Equity linked mutual funds are risky, and with falling interest rates, fixed deposits (FDs) no longer remain as attractive as they used to be earlier.
Enter GrowFix, a startup trying to productize a new asset class: fixed-income [less risky than stocks], collateral-backed asset [higher returns than FD].
Excited? Let’s dive right in!
The Indian Retail Investor Story
India’s love affair for Fixed Deposits, though waning over the past year or so, is historic. It still constitutes for more than 50% share of total deposits. The other 50% comes from a variety of asset classes - real estate, mutual funds & equities.
[If this is hard for you to believe, congratulations, you might be in the top 1% of India]
Pre-2012, real-estate was “in-the-money”. People would be looking at owning multiple homes, making money off the rent & EMI difference, not to forget the tax exemption offered by a home loan. Then it suffered a meltdown. And Mutual Funds became hot, thanks to ad campaigns and a jingle hard to ignore. [Mutual Funds Sahi Hai].
Post early 2018, people started realising that even mutual funds give a 10-12% return more or less. This created a void and investors started looking at equities & other alternative investments. As per BSE data, retail investor participation jumped 2x from 2019 to 2020. [Investors opened 3.4 million new demat accounts in the September quarter]. But there was still a gap for fixed asset high return products. And this is where GrowFix comes in.
We sat down with Ajinkya Kulkarni, Co-Founder of GrowFix to know more about his product and what he is trying to achieve through it.
Why did he start GrowFix?
Ajinkya used to put some money into his dad’s business that offered a fixed 11% return with no lock-in period. His friends eyes’ would light up on hearing that. He discovered that the standard Indian investing philosophy is “greed in moderation”.
The average investor seeks fixed return with minimal volatility and higher return than FDs. After toying with multiple ideas, he realised that there were a certain set of debt instruments that were only accessible to HNIs [High Net-worth Individuals] who invested in a ticket size of Rs 50 Lakhs - 1 crore. Retail investors don’t even have a clue about these investment avenues. Why though?
“Most such products are based on relationships. With most such managers from Tier1 MBA colleges, a ticket size less than 50 Lakhs doesn’t make financial sense. We figured out that if we can properly educate the buyer through technology, it translates to a scalable model with minimal operations costs. Then you only need to worry about the LTV”.
With a background of working with an NBFC, Ajinkya teamed up with fellow cofounders Abhik, Anshul & Shashank to leverage this insight. And that’s how GrowFix was born.
What is the product?
With a focus on fixed-income assets, GrowFix promises a high-return collateral backed bankruptcy protected debt product. A no lock-in period and liquidity independent of market conditions further ups the appeal. It recently launched a product called GrowFix Gold, a form of covered bond. Let’s take a look at how it works.
NBFCs want to grow their capital. And lending is their prime source of income.
Step 1: NBFCs roll out gold loans to borrowers and create a portfolio. This loan is backed by gold as collateral, nearly 1.5X in value.
Step 2: GrowFix teams up with this NBFC and buys a part of this portfolio to offer its customers through a listing on BSE.
Step 3: In case the borrower defaults, there is always gold to liquidate. So, the GrowFix customer is effectively funding another retail borrower’s gold loan.
Step 4: The difference between what GrowFix charges the NBFC (11%) and the customer (9%) is its margin -> roughly 1.5-2%.
Ajinkya explains this using an example on GrowFix’s Medium blog.
GrowFix Gold - Deal Breakdown
GrowFix has partnered with Kanakadurga Finance Limited [NBFC] for the first deal under GrowFix Gold. Offering pre-tax returns of 11%, investment can be done in lots of 10,405 Rs. This is what your final earnings would look like if you buy 10 lots.
Regarding taxation, if you hold for >12 months, you will be taxed 10% on interest. If you withdraw before 12 months, you will be taxed as per income slab.
But wait, what about regulations?
Regulatory hurdles, though difficult are still solvable. NBFCs are more than willing to explore a new source of funds. Taking an excerpt from GrowFix’s Medium Blog
Why are gold loan NBFCs interested in retail money supply?
Here is a secret of finance business: everyone loves retail finance! However, it is very costly to reach out and make the brand. Creating such a brand often requires investing significant money and resources for a long time.
GrowFix is helping NBFCs raise retail money. NBFCs believe that they would be able to build trust in retail investors and can leverage it in the long term. Currently, the NBFCs raise debt from banks and HNIs. Retail funding will lead to diversification in source funds and therefore stability on the supply of capital for the NBFC.
Ajinkya had co-founded creditperiod.com in 2014 [acquired by flexiloans.com in 2017] & has worked for CreditVidya and Mswipe Technologies for 3+ years. With such a vast experience in the NBFC space, getting them on board for GrowFix was a walk in the park for him. They’re basically getting money through the customers that GrowFix is able to bring. Who will say no to that?
#learningwithSU: Handling SEBI & BSE was easy. Entrepreneurs looking to venture into FinTech should understand that a prior background in this domain goes a long way in establishing trust beforehand.
Where it does get tricky, is the ticket size. NBFC wants a 50-100 crore business, not a 5-10 crore business. They also have a high underwriting criteria [guidelines set by banks and lending institutions for determining whether a borrower is worthy of credit], which becomes a key hurdle.
On top of that, low retail participation makes it a chicken-and-egg problem. There are a variety of reasons why retail participation is low in debt markets.
Low returns
Corporate governance issues
Lack of financial awareness
And thus, FD ends up becoming the de facto choice for debt funds. But GrowFix doesn’t compete with FDs, Ajinkya tells us.
“We don’t aim to replace FD. This is a more evolved product. Think of this like an alternate to debt mutual funds. That space is significantly huge with nearly 6-7L crore AUM [Asset Under Management] from retail investors.”
Market Size & Future of Debt Fund Investments
The product is aimed at top decile investors with 30% tax bracket . An LTV [Lifetime Value] of Rs 10-20k will never make sense. GrowFix aims at Rs 5-10L over long term AUM starting with Rs 5-10k as an investment corpus to generate trust. Even if you look at the 30% tax bracket, that’s a 70-80L population. A 10% share of that ~ 5L investors investing 10L a year, gives nearly 50,000 cr market.
And in this market, competition is basically for investment share of a customer’s wallet. So debt asset funds, FD, mutual funds, REITs [Real Estate Investment Trusts] could be labeled competitors in a broader sense. Within debt products, there are certain companies like Grip Invest that have launched similar but slightly riskier products. GrowFix is all about fixed-asset high return products. With such a product, GrowFix is able to minimize credit risk though liquidity risk still remains.
More products like loans against vehicles, timber plantation, housing etc are already in the works. But the space is too small currently to focus on competitors.
Competitive Advantage - Trust is Key!
The focus for GrowFix is building trust through transparency and educating the buyer. FinTech is all about trust. This insight is so archaic I might as well say,
“Thou shall generate trust. Thou shall hold all the cards”
But Ajinkya takes this one level deeper to talk about GrowFix’s moat. He talks about building trust through transparency. And creating a compelling story through it. All consumer internet startups need a compelling story, he says. Having spent countless hours speaking to customers - nearly 2000 of them, he educates them clearly about the risk & rewards of the product, & why this may not be for them. He realises that sales won’t work. But education & distribution will.
#learningwithSU: Most founders have an incredible sense of self-awareness. They know their strengths & weaknesses very well and recruit people to cover all such blind spots. What to work on vs what to delegate is key to becoming a successful entrepreneur.
GTM Strategy
Ajinkya went at length to talk about details of the product on LinkedIn to get customers to land on GrowFix website. A quick look at the GrowFix website will tell you how much investment has gone into educating the buyer right from Step 1. One can also easily set up a time with the team to understand more about the product. Ajinkya himself has been a prolific writer on LinkedIn, that has also earned him the LinkedIn Top Voice 2020 as a by-product.
Now with a dedicated resource for content creation, GrowFix is targeting to expand to Twitter and other distribution channels like Zerodha & offline mutual fund partners to increase top of the funnel traffic.
#learningwithSU: LinkedIn has a content creation gap. LinkedIn made it easier to grasp the target persona - folks working in startups, consulting etc. Easier to scale
Current Growth Metrics
With nearly 200 customers from 2000 signups for GrowFix Gold, this 0-CAC model certainly seems to be working. GrowFix is now looking to acquire licenses, expand the team [there are only 4 co-founders so far] and build a solid tech layer to avoid fraud on the NBFC side. After GrowFix Gold, another product - GrowFix Wheels, a newly launched product, for a dynamic portfolio of vehicle loans is already on the cusp of launch in a deal worth Rs 20 cr with a Morgan Stanley-backed NBFC.
#learningwithSU: Transparency & Trust are important values that build a great culture in the company. Passion is very important, especially in the pre-PMF [product market fit] stage of a startup. Always try to show how you displayed exemplary passion through your actions in the past while interviewing for such a role.
The Road Ahead
FinTech in India is a big hot market. And will generate multiple unicorns. GrowFix has rightly picked a so far untapped segment. With a team experienced in the nuances of financial debt markets, it certainly has its pieces well placed so far. But it’s yet to test product market fit where most of its challenges will begin.
The FinTech playground now has a lot of players catering to the retail segment - momentum investing, small-cases, algorithmic trading etc. It’s not a winner-takes-all market for sure, but the battle will be for the investment wallet share of the consumer. And this wallet in real terms is still tiny [<4% of Indian population invests].
GrowFix is targeting a proportion of this 4%. Hence, a high LTV is incredibly critical. When it comes to profitability in FinTech, well, the jury is still out on that.