India is home to over 2.5 lakh high networth individuals (HNIs) and about 7,000 ultra HNIs (UHNIs). Known for their higher risk appetite, these affluent investors dabble in different asset classes and product offerings. Sameer Kaul, MD & CEO of TrustPlutus Wealth (India), a wealth management firm focussed on HNIs and UHNIs, in an interview to BL Portfolio shares his insights on the changing investment landscape for HNIs.

Traditionally, HNIs have relied on a mix of equity and debt investments. How has this changed today?

Over the years, many new investment options have been added for HNIsin India, outside of vanilla mutual funds and stocks. For instance, HNIs can now invest in Sovereign Gold Bonds/Gold ETFs, they can take exposure to real estate through Real Estate Investment Trusts (REITs) or real estate linked debentures.

Infrastructure Investment Trust (InvITs) are an attractive vehicle to invest in infrastructure assets and the Liberalized Remittance Scheme (LRS) and rupee denominated fund of funds are an attractive way to diversify the portfolio. Last but not the least, ideas such as pre-IPO investments, venture debt, private equity and hedge funds are also finding takers from within the HNI community.

Many HNIs are taking to exotic asset classes. Do poor liquidity, lack of proper regulation, amongst various other negative factors not deter them from investing in exotics?

Investors should always evaluate each investment from the point of view of potential return, associated risk and liquidity. Investments into so called exotic asset classes such as private equity can be pursued subject to setting a cap in the overall asset allocation so that the long duration nature of such products and the lack of liquidity does not create challenges for the investor in terms of their overall investment objectives. Many investment options can work out in the favour of an investor as long as adequate due diligence is done, investment is in line with the asset allocation and the investor is comfortable with the risk profile as well as the lack of liquidity associated with such investments.

The stock market has risen unexpectedly. What does this mean for UHNIs and HNIs?

While the vibrancy in the stock markets may seem unexpected at first, the key drivers that have helped generate stellar returns in equities are low interest rates, high systemic liquidity, fast recovery as a result of reopening driven by higher vaccination rates and high expected growth rate in profitability. That said, UHNIs and HNIs should continue to be disciplined in their investments by adhering to their long term asset allocation and rebalancing their portfolio periodically so as to ensure that they are not over exposed to a particular asset class.

For fixed income investments, what approach do HNIs take? What are the avenues they us to emulate fixed income risk and return experience?

As far as fixed income is concerned apart from mutual funds, we do actively recommend to investors to invest into REITs/InvITs, take bi-lateral counter party risk through market linked debentures (MLDs) and invest into AT1 bonds issued by the highest rated banks.

For retail investors, tax efficiency is often a big draw, for instance ELSS. What are the most tax-efficient investment strategies for Indian HNIs?

Mutual Funds are the most tax advantaged legal vehicle as long as the holding period is long term in nature. HNI investors can also consider buying tax-free bonds if they are not a part of the portfolio. REITs are also tax advantaged, where return of capital (amortization of debt) is tax exempt and dividends are also tax exempt for the unit holder if the REIT has not opted for the new tax regime.

Has the advent of real estate AIFs and realty private equity funds helped strengthen HNIs' love for realty?

HNIs are always attracted to products where the underlying is real estate. While real estate funds as well as exposure taken bi-laterally on real estate issuers were popular in the past, some of those investments have turned sour and investors have had to resort to litigation to recover their dues. There should be a place for real estate in the portfolio and investors should gauge the return expectations, risk profile and liquidity challenges before making fresh investments in this asset class. HNIs are taking part in real estate investments in fractional investment mode through REITs and we feel this will become an attractive investment option over a period of time.

Portfolio Management Services (PMSes) are touted as being better for HNIs compared to mutual funds. But is the convenience of custom building a long-only portfolio and owning shares directly in one's demat account worth going for PMS? Unless it’s under-researched small-caps, does having exposure to PMS make sense for HNIs?

We do not believe that PMSes are better or worse than MFs. Both have a place in client portfolios. Mutual funds by design are more diversified in their portfolio construct while PMSes can take more concentrated bets. We encourage clients to take benefit of style diversification across managers and the same cannot be achieved by investing only in MFs or PMSes but by investing in a combination of both.

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