High networth investors who were underweight on stocks should now get fully invested, says Rajesh Iyer, Head, Investments and Family Office, Kotak Wealth Management. Tax-free bonds and US stocks also remain good bets.

Excerpts from the interview

In the last six years, equities have hardly delivered any returns. So, what is your advice to affluent clients now?

We have been underweight on equities in the last few years. But over the last two months, we have been recommending that clients start building their equity portfolio and getting invested according to the recommended asset allocations.

For markets, the election is going to be an important event to decide the path ahead.

But we also believe that most of the bad news has already been discounted. The risk-reward trade-off is not that skewed toward risk at this point in time. It is reasonable enough to get fully invested.

At the same time, we are not overweight on equities. We have just started to take some exposure in mid-cap stocks.

What are you advising clients on debt now?

In debt, we typically advise a client whether to invest at the shorter end or longer end of the yield curve.

In the last couple of months, fresh investments have been made at the shorter end of the curve — anywhere between two and three months. For the long term, there are tax-free bonds. Allocation to this should be about 15-20 per cent.

What about gold as a diversifier?

It gets a little tricky here. Gold is not following any trend in particular. It can be used to hedge and so 5-10 per cent of the portfolio can be allocated to gold. It can also act as a good currency diversifier.

What do you have to say about global investments?

The US market is in focus from a diversification point of view. Five to ten per cent of allocations could go to this market. We are looking at Europe as well, but have not firmed up anything as of now. All this is on the equity side. Investing in debt abroad doesn’t make any sense as yields here are better and it is tax-efficient as well.

Which are the areas where you see a lot of action among your HNI clients?

We cater to the ultra-HNIs — typically with a minimum investment of ₹5 crore. We are seeing a lot of entrepreneurs wanting to sell their businesses to a strategic partner rather than to an investor like a PE fund, as they are able to get a good price for it.

There is a lot of interest globally to expand within India and acquire businesses.

Thus, a lot of action is happening in this space, where Indian entrepreneurs are able to get good value for their businesses — 10 times operating profit (EBITDA) — instead of three-four times. Over the last three years, many such deals have been struck across various businesses. We continue to see a lot of participation in this space and that is where the growth is — whether it is tier 1, 2 or 3 cities.

Do your clients look at alternative investments?

The alternative investments they look at are typically hedge funds, private equity or real estate private equity.

These are routed through venture capital funds or AIFs (Alternative Investment Funds). In the past, after the Lehman crisis in 2008, these alternative assets did not perform well.

Also, there has been a lot of churn within the group of people managing this kind of investment. That has also been a problem for both the industry as well as investors.

It will take one or two cycles to gauge who are the kind of people who can really add value. Most of them would say that they need good cycles to sustain returns.

Clients mostly want to be charged on a 2/20 basis — 2 per cent management fee, 20 per cent performance fee.

But one cannot say the market has not done well but I will still keep making my 2 per cent. While things may change in the future, right now it is still in an exploratory stage. Clients want to participate in these opportunities, but they need stability and returns to justify the fees and lock-in.

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