And the winner is, equity

The last one year has seen much hand-wringing and doomsday predictions about financial investments. But even as the global economy has had to cope with a slew of significant events such as the US Fed beginning the rate hikes, Britain voting to exit the EU or slowing global growth, financial markets have been holding up quite well. While equity markets and bullion staged a smart recovery since March, bond yields have also moved lower helping existing bond investors.

In other words, investment classes have put up a decent show amid much scepticism. So what have the high networth individuals (HNIs) been doing over the past year? Which assets classes have they preferred? We spoke to few wealth managers to gauge the mood among HNIs over the past year.

It’s equity that has attracted the most HNI money over the past year, say experts. Nifty is up 10 per cent since the beginning of this year and 28 per cent since the low hit in February this year. “HNIs are not too different from other investors and are governed by the same greed and fear syndrome,” says Sriram Iyer, CEO, Religare Private Wealth.

“Though we have been cautious about equity markets over the last six months or so, stocks have rallied and HNIs have been betting on equities; this is reflected in the inflows in mutual funds. While we are beginning to hear questions such as ‘should I book some profit?’, ‘should I move to the sidelines?’ participation in general is still high.”

Ajay Bokde, CEO & Chief Portfolio Manager, Prabhudas Liladher, concurs adding that HNIs have been viewing corrections as an opportunity to invest. As a result, the corrections in market have been quite shallow as money keeps entering with every dip. He thinks that participation of HNIs in mid- and small-cap stocks has also increased.

The IPO market has also yielded good gains over the past year with some offers such as Infibeam, Ujjivan Financial Services and Advanced Enzyme Tec giving around 100 per cent returns to investors since listing. All wealth managers believe that HNIs have been taking leveraged bets in these issues to make hay while the going is good.

With interest rates moving lower, India’s wealthy aren’t keen to park money in fixed income instruments. While 10-year government bond yields have moved lower, this helps only the existing investors of these bonds. “With interest rates on the whole moving lower, fixed deposits or plain vanilla bond funds are not going to yield more than 7 to 8 per cent going forward,” says Ashish Shanker, Head - Investment Advisory at Motilal Oswal Private Wealth Management. Investors therefore have not put too much money in fixed income instruments.

“But there is interest on the margin for high yielding perpetual bonds of banks. For instance, Bank of India, Syndicate Bank etc had launched Tier I bonds that were yielding around 10.5 or 11 per cent, thereabout,” says Shanker.

Sriram Iyer thinks that the modified rules for taxing debt instruments have taken the bite out of these instruments. He thinks that investors might have made some money in dynamic bond funds over the last six to eight months, but incremental allocations are happening in equity rather than in debt.

The fund-starved real estate sector is finding it easy to tap the funds lying with high networth individuals through real estate funds. “Lot of money is going into real estate funds as returns are moving lower on other fixed income instruments,” says Shanker. Motilal Oswal has already launched the third series of real estate funds for which they have collected ₹900 crore. Reliance Capital and ICICI Venture are other companies that have launched a similar instrument. These are categorised as alternate investment funds; so, the minimum investment is ₹1 crore. But the money can flow in a staggered manner over 18-24 months.

These funds invest in projects of builders on whom due diligence has been done. Collaterals can be inventory or cash-flow from the project and sometimes personal guarantees.

There are mainly three types of funding models in real estate funds. The first model is like equity where receipt of money is back-ended. Here, the investor participates with the developer in the project and the return expectation is much higher; around 25 per cent. Then there is mezzanine capital fund where the developer gets money for the project. Interest payment starts after a moratorium period that could be around 12 months or so; and ranges between 13 and 14 per cent. When the loan matures, the builder makes a one-time bonus payment; so, the return works out to 22-25 per cent. Then there is the traditional debt, which is typically for construction. The coupon here varies between 18 and 20 per cent.

Margin financing for primary offer is also popular, but it is a high-risk game. Many NBFCs do margin funding for IPOs, wherein the NBFC puts in 90 per cent and the HNI the balance. If the stock does not list at a premium, there will not be enough money to cover the interest. So there is risk of default.

There are a few India-based hedge funds that are operational, but they have not quite caught the fancy of HNIs yet.

REITs and InvITs are the new investment buzzwords. “The jury is still out on REITs and InvITs,” says Iyer. “We are talking to a client about launching an InvIT in education sector where the vehicle will hold a bunch of school and education institutions’ assets that will give return of around 10 per cent and post-tax return could be 7 per cent. People are interested, but there isn’t a huge pent up demand yet. People will want to understand the yield and capital appreciation profile before investing. I think people will wait, watch and then invest.”

Physical assets such as real estate and gold have not performed too well in recent past and investor reaction to them has also been lukewarm. “In an era of high inflation, real interest rate is lower; so, more money moves in to physical assets to protect against inflation. Now, with inflation moving lower, money is not too attracted to physical assets. But if there is geo-political risk resurfacing or debasement of currency, and so on, there will once again be motivation for holding gold,” says Bodke.

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