How fractional ownership aids your investments

The concept of fractional ownership of an investment asset is that multiple investors get together and create a pool of funds when one individual does not have the requisite ticket size due to the price of the asset being on the higher side. As per Investopedia, “Fractional ownership is an investment approach in which the cost of an asset is split between individual shareholders. All the shareholders get the benefits of the asset, such as income sharing, reduced rates, and usage rights”.

In India, the concept of fractional ownership is practised in real estate. Fractional real estate (FRE) is an informal structure wherein an entity involved in real estate business or real estate services gets a set of investors together, pools the money through legal documentation and invests in a property that otherwise would have been unaffordable for one investor. Reportedly, market regulator Sebi is working on issuing guidelines to control the FRE segment for the sake of investor protection.

If we go by the concept and not strictly by technicals, the fractional ownership concept is practiced in many other investment assets. For instance, Global (US) stocks are listed on the NSE IFSC at Gujarat International Finance Tec-City (GIFT). Select leading global stocks are listed on Indian exchanges—NSE and BSE—operating at GIFT City. The price of these stocks, in rupee terms, would be on the higher side due to the currency conversion rate. The way it works is that you cannot buy the stock directly but can buy an IFSC receipt, which is a negotiable financial instrument in the nature of a depository receipt (DR). The US stock is the underlying asset, and the receipt represents a fractional ownership of one stock. For illustrative purposes, let’s assume you have a positive view on the Apple stock and want to take exposure to that. The price of the stock is, say, $170. At a conversion rate of ₹82 per dollar, the price per share of Apple would be approximately ₹14,000. The price of one DR with Apple as underlying at NSE IFSC is, say, $6.71. At a conversion rate of ₹82, it will cost approximately ₹550. Hence, with a DR, you are buying about 4% of one stock of Apple, with commensurate benefits in price appreciation, dividends, etc.

Mutual fund (MF) schemes sell units of ownership in a pool of investments. As an example, when you purchase one unit of an exchange-traded fund (ETF) with Nifty or Sensex as the underlying, you are actually buying a fraction of Nifty or Sensex. It imparts the benefit of small scale to investors who do not have the ticket size to purchase all the stocks in Nifty or Sensex.

Non-fungible tokens (NFTs), which are not strictly investment assets as these are informal and non-regulated, works on the concept of fractional ownership as the ownership of one asset is distributed among many. Cryptocurrency exchanges—though it is debatable whether these are “exchanges” as it is not regulated by Sebi or any other authority—offers a tiny fraction of ownership in one cryptocurrency. Given that the concept is there in some form or the other, and it helps retail investors in terms of ticket size, it can be formalized and introduced in mainstream investments, i.e. stocks and bonds.

There are Indian equity stocks with price on the higher side. An example would be MRF with a share price of approximately ₹1 lakh. Then, there are bonds with face value of ₹1 lakh or above. While MFs can help buy such units at an affordable price, financial markets are developing and new instruments are becoming available to investors. A financial services provider can offer fractional ownership in stocks and bonds by pooling money from multiple investors. However, that would be informal and available only to a limited set of investors. Rather, it should be introduced as a product by the exchanges, i.e. NSE and BSE, so that the benefit is available to all investors.

How would this work? The exchanges will offer a stock or bond with price beyond a threshold. The receipt would be available at the exchange, representing a fraction of ownership of the stock or bond. Trades will happen at the exchange platform on the receipts, where the price movement will represent the movement in the underlying. The benefits of dividend or interest will be distributed proportionately or built in the traded price of the receipt.

With increasing investor base in the country and increasing financialization of savings, and ‘retailization’ of availability of investment avenues is desired.

Joydeep Sen is a corporate trainer and author.