As the economy grows, the number of high net worth individuals keep on increasing, as well. So who is an HNI?
Internationally, an HNI is defined as someone with financial assets of over $1 million, excluding residential property. And there are more and more investment avenues that are opening up for such individuals. Here we discuss some of them.
Stocks and funds
Equities and mutual funds are the preferred asset class for most HNIs to park their wealth. The advantage with equities is that they provide long term returns, almost to the tune of 15 per cent a year over the long-term.
Another advantage with equities as an asset class is that the returns are subject to very low taxes, if sold within a year. Over one year, the tax liability is zero. Even the dividends are tax-free for the shareholder. Since HNIs come under thehighest tax bracket, tax efficient investments like equities make more sense for them.
Portfolio management schemes
If the HNI does not want to dabble in equities directly, probably because he does not have the skill to analyse stocks or doesn't have the time, he can hand over this task to a professional portfolio manager.
Many broking houses and mutual funds offer these services. By regulation, the minimum investment in a PMS has to be Rs 500,000. However, in practice many service providers, especially PMS schemes of mutual funds, insist on Rs 50 lakh (Rs 5 million) as minimum investment.
In a PMS, the funds of HNIs are invested in equities, which are managed by professionals. The charges, yes, are high as well. These could include a fund-management fee plus expenses.
Moreover, many broking firms also charge the client some percentage of the profits earned. The advantages, however, are manifold. These overall costs could turn out to be lower in terms of percentages shelled out because they are designed as an HNI product.
Also, the pressure to perform is greater on the fund manager.
This is an upcoming market but still needs to develop further. There are opportunities in precious metals like gold and silver, where HNIs can take deliveries in demat mode, or they can even trade in commodity futures of bullion, agricultural and industrial products like metals.
In the past few years, investment in property has become attractive because of the high returns that it has provided. There are clear indications that HNIs are aggressively adding land, residential and commercial properties to their portfolios.
Commercial properties, which require high capital investments, but yield a rental income of around 10 per cent per annum, along with capital appreciation are a big hit nowadays.
Similarly, even residential properties have seen investors, though rental yields are lower at around 6 per cent a year.
Of course, even private funds by financial institutions have added to the lustre by inviting HNIs to invest in large realty projects, with a minimum investment of Rs 50 lakh-2 crore. These funds are generally closed-ended for five years or so, and allows investors to participate in real estate investments, without going through the personal headache, albeit for a fee.
This investment class too has been attracting a lot of HNIs lately and even overseas buyers have started showing interest in contemporary Indian art. Also, prices of art works have shot up.
However, the hindrances arise from lack of a concrete model of valuation of art and authenticity. There are also other issues of high transaction costs and low liquidity.
But these are minor issues for the HNI. Of course, for the risk-averse, there are always opportunities in fixed income schemes, which are presently yielding between 8-10 per cent. And for those seeking very high capital safety, government of India bonds issued by the RBI have been the perennial favourites.
With the RBI allowing individuals to invest $100,000 abroad, there are opportunities in property, equity and so many other asset classes abroad. The rich have a large number of opportunities to invest. And they are likely to keep on growing in the years to come.
The writer is director, Touchstone Wealth Planners.