Hnis' Investment Strategies In India: Where Do They Invest?

High Net Worth Individuals (HNIs) are those with liquid assets of over 5 crores to invest in India. They are a diverse investor category with a unique financial status and face various opportunities and challenges. HNIs can invest in different options like alternative investments, portfolio management schemes, market-linked debentures, real estate funds, and angel investing. In this response, we will explore the various investment avenues available to HNIs in India and how they can navigate the challenges to make the most of their wealth.

Real estate

Residential real estate has long been a popular option for High Net Worth Individuals (HNIs) in India. Multiple homes are purchased either to be rented out, used as holiday homes, or for the younger generation. This is due to surging incomes, easy availability of bank loans, and appreciation in prices of residential real estate post-liberalisation. The passing of the Real Estate Regulatory Authority (RERA) has offered substantial transparency and redressal mechanisms for HNI home buyers. Developers have been constructing projects with high build quality and several amenities appealing to HNIs.

Commercial real estate has also emerged as a preferred investment destination for HNIs. The average yields offered by commercial real estate are higher than those of residential properties, averaging around 6% to 8% and even touching 11% in some instances. Demand for Grade A office spaces has been increasing in prime locales, and these properties turn out to be high-income-generating, low-risk assets. Apart from office spaces, HNIs can also consider warehouses and shopping centres.

However, investing in real estate in India is not without its challenges. Real estate transactions take time, and impatience can lead to overpaying or investing in a property that doesn't meet expectations. Delays in project completion can also impact returns. It is crucial to conduct thorough research and verify property documents to avoid scams or disputes.

There are various ways to invest in Indian real estate, each with its own advantages and disadvantages:

• Buying Physical Property: This is the most traditional and direct way, offering full control and ownership of the property, regular income through rentals, and capital appreciation. However, it also comes with high investment costs, lack of liquidity, legal hassles, and market risks.
• Fix and Flip: This strategy involves buying a property that needs maintenance, fixing it up, and selling it at a better price. It offers quick returns and low initial investment costs but carries high risk and uncertainty and requires significant skill and effort.
• REITs (Real Estate Investment Trusts): A more indirect and passive approach, where investors buy units of a REIT, similar to a mutual fund. REITs offer low investment costs, high liquidity, regular income through dividends, and professional management. However, they have low capital appreciation and regulatory restrictions.
• InvITs (Infrastructure Investment Trusts): Similar to REITs, InvITs invest in income-generating infrastructure assets like roads, bridges, and power plants. They offer low costs, high liquidity, and regular dividends but have low capital appreciation and regulatory restrictions.
• Real Estate Mutual Funds: These funds invest in securities of companies in the real estate sector. They provide low investment costs, high liquidity, and professional management but have no direct exposure to physical property and may have high expense ratios.
• ETFs (Exchange-Traded Funds): ETFs track the performance of an index, such as the Nifty Realty Index. They offer low costs, high liquidity, and passive management but lack direct exposure to physical property and may have tracking errors.
• Fractional Ownership: Investors buy a fraction or share of a property, providing low investment costs, partial ownership, and potential for regular income and capital appreciation. However, this option may suffer from lack of liquidity, legal issues, and market risks.

Mutual funds

HNIs can choose from a wide range of mutual funds, including equity funds, debt funds, and hybrid funds. They can either invest a lump sum or in tranches through a systematic investment plan. Mutual funds are a form of passive investment, which means they are low-cost funds with relatively lower risks and the potential for higher returns based on the performance of a benchmark index. They also offer the benefits of diversification and are often considered safer than actively managed funds.

HNIs can also consider investing in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). The Securities and Exchange Board of India (SEBI) has recently reduced the minimum investment value for REITs and InvITs, making them more accessible with a required minimum investment of only INR 10,000 and INR 15,000, respectively. These investment options offer a diversified asset class with intermittent income streams and consistent returns, as they are required to distribute 90% of their earnings to unit holders.

Additionally, HNIs can seek advice from professional wealth managers to help them navigate the different investment options and generate optimal returns.

Sovereign gold bonds

The interest rate is fixed at 2.5% per annum on the initial investment amount, payable half-yearly. Investors also get tax benefits in the form of exemption from capital gains tax if the bonds are held until maturity. The bonds can be purchased online, and investors need not worry about storing them in a physical locker.

For investors looking to diversify their portfolios and protect their wealth, sovereign gold bonds can be a good option to consider. With a minimum investment of 1 gram, investors can gain exposure to the gold market and take advantage of the benefits that come with investing in gold, such as a hedge against inflation and a store of value.

Commercial real estate

Office space has become the most preferred segment, accounting for 67% of HNI total investments in real estate. As of Q1 2020, India had 601 million sq ft of Grade-A office space across its top seven cities, with record absorption, steady rentals, and low vacancy levels. The successful listing of two office space-based real estate investment trusts (REIT) since April 2019 further highlights the potential of this market.

The average annual net absorption for the last four years has been 30 million sq ft, and the strata office market is estimated to be around 180 million sq ft across the top seven cities, valued at approximately INR 2.26 lakh crore (USD 30 billion).

The ongoing COVID-19 pandemic has posed unprecedented challenges to the real estate market, but it is expected to emerge refreshed with new trends. As a tangible asset class with stable income, steady returns, and collateral value, real estate will remain an essential component of HNI portfolios.

In terms of preferred locations, a 2024 survey by WiseX revealed that 64% of HNI investors prefer the fractional ownership model when investing in commercial real estate. The top preferred locations for these investments are Bengaluru (31%), Pune (24%), Mumbai (22%), and Delhi NCR (13%).

The survey also indicated that 69% of HNIs plan to increase their investments in real estate, demonstrating a bullish outlook on the sector.

Direct investments in equities

HNIs can invest directly in stocks if they have the relevant experience and are adept at substantial research. First-time investors can start by investing directly in shares of companies with strong fundamentals.

HNIs can also invest in international stocks if they are seeking geographical diversification and a hedge against rupee depreciation. International investments offer a broader range of investment options and lower correlation to Indian markets, making them an attractive option for managing risk and portfolio volatility.

Dividends from both domestic and international equity investments can form part of an HNI's passive income.

Experts advise HNIs to allocate a bigger chunk of their investments towards equities and to stay invested for a long horizon of 5-10 years.

Frequently asked questions