HNIs have started preserving money instead of opting for Quick Returns

Where do India’s super rich put their money? Of course, they buy expensive cars, villas and opt for exotic holiday destinations. They’ve also proved that they’re good in deft handling of their investments.

There has been a phenomenal growth in the number of High Networth Individuals (HNIs) in India in the last few years. As per the findings of the Merrill Lynch Global Wealth Management report in 2010, India’s HNI population grew at 20.8 percent to 1,53,000 compared with 1,26,700 in 2009. HNIs' wealth in India grew by 22 per cent in the period 2009-10 accounting for US$ 582 bn wealth, as compared to US$ 477 bn in 2008-09.

According to the report, HNIs invested almost one-third of their savings in equities. However, the uncertainty prevailing globally in several asset classes, leading to frequent volatility, has impacted the investment sentiment of the HNIs. Now, the focus is more on capital protection products than on equity.

The world has still not recuperated from the period of uncertainty. While there have been bouts of recovery, like in second half of 2009 and similar period in 2010, the last four years have been more or less full of economic uncertainties.

The dream bull run of 2005-2007 saw HNIs flocking to the equity markets to make quick money. Many were successful but lot of people saw their wealth wiped out in matter of few weeks after the crash in 2008. Those who again mustered courage and started investing in 2010, burnt their fingers as the market kept sliding down since January 2011. All this made HNIs risk averse. “HNIs are asking much harder questions now. Fixed income is the new 'hot' idea as HNIs find it relatively safer. The focus is more on preserving capital and not so much on returns,” said Swapnil Pawar, chief invesment officer at Karvy Private Wealth.

According to wealth managers, risk aversion makes huge impact on the choice an investor makes over an asset class. Majority of the wealth of HNIs is distributed in three categories – equities, fixed income and real estate. There has been a major change in attitude towards these products in the last 18-24 months.

EQUITY

The pre-crisis period saw HNIs flocking to the equity markets as making money had become a child's play in the high growth era when almost every stock was rising day by day. The party which stretched for 3-4 years abruptly ended in January 2008 when market started tanking day by day. The initial reaction was of disbelief and when investors were back to their senses, capital protection was on top of their mind.

While equity is known to give best returns compared to other asset classes over a longer period of time, this time it’s testing investors' patience. In the last 2 years, the benchmark BSE Sensex has given negative return of (-)4.7 per cent while over the last one year, the negative return has been (-)11.1 per cent. In fact since January 2008 till now, the markets have given a negative return of over (-)22.3 per cent. “People have lost money which they never recovered. They have become significantly risk averse,” said Rajmohan Krishnan of Kotak Wealth.

“Earlier many HNIs invested in the equity markets in US and Europe. But things have changed now. After the financial crisis and fall of Lehman Brothers, they are wary of even big established brands in the developed world. The preference is to look at Indian companies,” said Anish Behl, Head-Strategy and Wealth Management, IndusInd Bank.

Mutual funds, which are an indirect route to invest into equities and diversify across sectors, has also seen a sea change in the way HNIs invest in them. “People now prefer equity funds which have a proven track record. They insist to invest in the schemes by established fund houses,” Pawar said.

While it may be a good opportunity to invest in the equity markets now, given the attractive valuations of many blue chip stocks, the HNIs are waiting for the tide to turn favourable before risking their money, experts believe. With the debt having given better returns than equities over the last 3-4 years, many HNIs are opting for fixed income products giving a passe to equity instruments. 

DEBT

There has been a marked shift towards fixed income products with a large number of people investing in variety of options available within the debt segment. Having burnt their fingers in 2008, HNIs now look for safety of capital and not so much returns.

“Compared to negative returns in equity markets, when bonds are giving 8.2 per cent annualised post-tax return why will people not flock towards debt products,” said Krishnan. While earlier debt as a category was utilised more by the institutions to park money for shorter durations, last 2-3 years has seen it generating lot of interest from the retail investors.

“Most of the HNI money is being deployed in real-estate and debt. They are exploring options such as fixed maturity plan, structured products, private placement bonds etc,” said Uttam Agarwal of Bajaj Capital.

REAL ESTATE

Indians are known to love investments into gold and real estate. Earlier real estate was one of the top choices of HNIs which ate maximum part of their savings leaving the rest for equity and debt. However, now investors have become quite cautious in their approach towards real estate. “HNIs now prefer better brands,. While earlier they looked at making money on 'pre-launch' offers, they now want to invest only in the projects that have already taken off. The craze for pre-launch offers is coming down drastically,” Agarwal said.

“Clients are a little fearful of investing into real-estate. Many ask whether there is a bubble in the sector,” Behl said. Despite concerns of slowdown, most of the investors have made money by investing in realty in the last few years. “Lot of HNIs invest in residential projects. Most have managed to get handsome returns,” Krishnan said.

Experts believe that the biggest benefit of the 2008 meltdown is the increased awareness about the various investment options. “HNIs have become a lot discerning now. Now simple products are more in demand,” Behl said. This is in a complete contrast with the earlier attraction towards the “exotic products” that HNIs preferred earlier. Markets were flush with such exotic products in the pre-crisis period with an attempt to tap maximum number of HNIs.

Some of the exotic schemes were companies that invested in vineyards, or water treatment plants or even in distressed assets globally. Each of these categories promised high returns but were fraught with risk. “Many HNIs wanted to invest in such schemes because of the show-off value. They felt proud in telling people that they understand a particular segment well and can make money from off-beat ideas,” Behl said.

HNIs have come out wiser from the earlier crisis and now focus on preserving their capital rather than looking to earn quick money through exotic investment ideas. This is in line with the approach of most of the fund managers who are looking at safer options till the clarity emerges on the economic front and equity again becomes a preferred choice.