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

High net-worth individuals (HNIs) in India are those with liquid assets or investable assets of over 5 crores. The investment landscape in India is ever-evolving, and HNIs have a diverse range of options to choose from. From equity and real estate to private debt and angel investing, HNIs can craft plans that suit their needs and long-term financial goals. In this article, we will explore the various investment avenues available to HNIs in India and discuss the benefits and challenges they present.

Equity and debt investments

Equity Investments

HNIs in India have the privilege of investing in private companies that are not publicly traded on stock exchanges. These investments are typically limited to accredited investors and carry risks, but they also offer the potential for substantial returns. Another option for HNIs is to invest in start-up ventures through venture capital, allowing them to secure an ownership stake in the company.

When investing directly in stocks, HNIs can choose from large-cap, mid-cap, or small-cap stocks, or a mix of all three, depending on their financial goals and risk tolerance. They can also invest in equity mutual funds, which provide access to a diversified portfolio of stocks managed by professionals.

Debt Investments

Debt investments are an important component of an HNI's portfolio, offering diversification and regular income. Here are some common debt investment options for HNIs:

• Corporate and Government Bonds: Investing in bonds and debentures provides diversification and creates a regular income source. Government bonds, such as Sovereign Gold Bonds, are considered a safe investment option, offering an assured annual yield.
• Market-Linked Debentures (MLDs): MLDs follow benchmark indices such as the gold index, equity index, or G-Sec yields. They allow investors to gain exposure to various market segments while avoiding the risks of direct asset exposure.
• Private Debt: HNIs can provide funding to companies in exchange for regular interest payments. This option offers stable returns for lump sum amounts and is suitable for those seeking lower-risk investments.
• Mutual Funds: HNIs can invest in debt mutual funds, which pool money from multiple investors to invest in fixed-income securities. This option provides diversification and access to a variety of debt instruments.
• Real Estate Investment Trusts (REITs): REITs allow HNIs to invest in multiple real estate projects, providing diversification within the real estate sector.

Real estate

In recent years, Indian HNIs have shown a preference for investing in commercial real estate, particularly office spaces. 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 office segment is expected to witness new trends and emerge refreshed as the world moves past the pandemic. HNIs can take advantage of opportunistic investments in this sector, making real estate a crucial component of their investment portfolios.

One of the main reasons for the shift towards commercial real estate is the higher rental yields compared to residential properties. While residential real estate typically offers yields of 1-4%, commercial assets in thriving locations can provide rental returns in the range of 8-10%. This makes commercial real estate a safer and more profitable option for HNIs.

Indian HNIs are investing a significant portion of their funds, up to 40-50%, in commercial assets such as office spaces, strata assets, retail spaces, food courts, and co-working spaces. The safety of these investments, coupled with elevated yields, is driving this trend.

When it comes to commercial real estate, certain cities in India stand out. For example, Noida in the Delhi-NCR region is attracting HNI investments due to its high per capita income, improved infrastructure, and heightened livability index. Bangalore, with its robust demand for leasing activities, is another attractive destination for commercial real estate investments. The Mumbai Metropolitan Region (MMR), home to several prominent businesses, remains the most sought-after commercial real estate market in India.

In addition to office spaces, HNIs are also investing in other types of real estate, such as luxury apartments, villas, and holiday homes. These properties offer world-class amenities, exquisite design, and the potential for high returns. Integrated townships and branded residences are also gaining traction among HNIs, providing sustainable and holistic living environments.

Overall, real estate investments offer HNIs in India a range of benefits, including potential for high returns, portfolio diversification, tax advantages, and wealth preservation. The dynamic nature of the Indian real estate market, with its varied offerings and encouraging returns, makes it a compelling choice for these sophisticated investors.

Mutual funds

HNIs can choose from a wide range of mutual fund options and invest a lump sum or in tranches through a systematic investment plan. They can also invest in start-up companies, known as angel investing, and diversify their investments across several companies to manage risks.

Financial advisors recommend that HNIs start investing early and allocate money across asset classes. They should set goals and time frames to achieve those goals. It is also important for HNIs to avoid common investment mistakes, such as poor diversification, failure to rebalance their portfolios, and choosing products that are not tax-efficient or lack liquidity.

With the right investment strategy and guidance from financial advisors, mutual funds can play a significant role in helping high-net-worth individuals grow their wealth and achieve their financial goals.

Private equity and debt

Private equity is a way for HNIs to diversify their portfolios and manage their wealth. It is considered an alternative investment option, which can provide tailored solutions and higher yields than traditional fixed-income strategies. Private equity is also a good way to get regular income by way of interest payments, though it is a far riskier option than investing in bonds.

Private credit is a rapidly growing asset class in India, with investments estimated at around USD 15 billion at the end of FY22. It is a medium of debt financing for startups, performing companies, and other special situations. The growth of the sector is moving in the direction of North American markets, where alternate credit is a significant portion of all risk financing.

Private credit is also an attractive option for investors because it offers higher yields than traditional investments like public bonds or bank deposits. This is partly due to the illiquidity premium associated with private lending, as these loans are not as easily sold or traded as publicly listed securities.

However, private credit often entails investments in relatively riskier market segments. As such, investors need to be aware of the risks associated with private credit investments, including credit risk, market risk, security risk, and legal and enforcement risks. Investments are typically locked in for extended periods, so investors need to be prepared for a longer-term commitment.

Sovereign gold bonds

There are several benefits to investing in sovereign gold bonds. Firstly, they offer an assurance of safety as they are backed by the Government of India. Secondly, there is zero risk associated with handling physical gold, as the bonds are purchased online and do not need to be stored in a physical locker. Thirdly, these bonds provide easy exit options, as they are tradable on the stock exchange, and investors have the option to exit after 5 years. Additionally, investors can earn a fixed interest rate of 2.5% per annum, making it a lucrative investment option.

The minimum amount an individual can invest in sovereign gold bonds is Rs. 4,627 (4627*1gm), while the maximum limit is 4000 grams (4 kilograms). For trusts and institutions, the maximum limit is 20 kilograms. The bond tenor is 8 years, with the option to exit from the 5th year onwards on interest payment dates.

Another advantage of investing in sovereign gold bonds is the ability to take out a loan against the bonds. Investors can use the bonds as a pledge to obtain a cheap loan from banks, similar to a National Saving Certificate (NSC). This option is not available for gold ETFs or gold bullion.

Overall, sovereign gold bonds offer a secure and convenient way for HNIs to invest in gold, providing both capital gains and fixed interest returns, while also eliminating the risks associated with physical gold storage.

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