Written by Vineet Kumar, pursuing Diploma in Entrepreneurship Administration and Business Laws offered by Lawsikho as part of his coursework. Vineet is Presently working as ‘Dy Head of Representative Office, Hanoi, Vietnam’ for Bharat Electronics Ltd India, a Navaratna Public Sector under Ministry of Defence, Govt of India. You can reach him here- Linkedin ID – linkedin.com/in/vineet-kumar-
There is no standard definition of HNIs in India, it can be based on Net Worth, Investible surplus, assets under advise of the individuals. The number is different from one company to other but, in India, individuals who have more than 2 crores investible capital are considered HNI or HNWI and Individuals with Investible surplus of Rs.25 lac – Rs.2 crores are considered as Emerging HNI. The Net worth is the amount by which your assets exceed your liabilities. By that definition of net worth, one can guess that HNIs are those whose assets exceed the liabilities by huge margin. In the same line, individuals who have humongous asset margin are called ultra high net worth individuals.
As per Karvy Private Wealth definition, HNI is a person with more than Rs.5 crore in investable surplus, while those with more than Rs.25 crore investable surplus fall in the bracket of ultra HNIs.
In the financial sector, this categorization is very important as high net worth individuals have a separately managed investment accounts, as HNIs clients usually demand extremely personalized services for banking and investment. Even in the IPO application, HNIs are required to apply in a separate category dedicated to them.
As per the report of Karvy Private Wealth while HNIs have been actively raising allocations to equity, fixed maturity plans (FMP) and commercial real estate are also emerged as favorite destinations for them to park money. Equally, nowadays they are spending generously on philanthropy.
Different HNIs, Different Needs
How to categorize HNIs? We can identify with above definition, but it will not give a proper view of HNIs. If we are looking at HNIs from the point of money management it is important to understand their source of income. HNIs needs vary because of the complexity in terms of their financial background, risk taking ability and willingness, market views and investment objectives.
As the number of billionaires in India is increasing, and these billionaires are coming from various backgrounds, simply they can be categorized into two broad categories: Self-Made HNIs & Inherited HNIs.
This category includes people who have come from all walks of life and have made their fortune through big salaries, bonuses, ESOPs and stock options. Those who have started their businesses and enterprises on their own and have created a big wealth.
This is essentially inherited money and comprises people who have inherited wealth or businesses.
HNIs Preference for Investment Solutions
It can be observed that HNIs seek a conservative investment plan. People with big wealth tend to take less risk simply because the downside is quite steep. Another reason is that they have high monthly and recurring financial obligations which depend on big capital and high liquidity. As their risk appetite is comparatively lower side, it better for them to deploy a big portion of their capital in fixed income assets like fixed deposits, treasury bonds, government and corporate bonds, etc. Equity exposure is important but conservative route is opted by the HNIs. As a major portion of the capital is parked in fixed income assets, they bring a small capital in the equity market. But they don’t go for daredevil investment opportunities by investing in small-cap and midcap segments, they focus only on blue chip stocks which have a high dividend yield and strong fundamentals. In a way, it would be safe to say, HNIs are highly risk averse in their investment.
As per ICICI private wealth management service, HNIs generally identify their needs on the following broad parameters:
Investments: While doing investment the three primary concern for HNIs are Wealth accumulation, Wealth preservation and Liquidity of wealth in long term. They generally take the holistic view of their wealth in terms Personal wealth and Business wealth and try to demarcate it for unexpected events.
Protection: HNIs opt for Protection solutions to safeguard their Wealth, Health, Assets and Against any Liabilities. These needs are typically overlooked by HNIs.
Credit: Though HNIs have huge surplus, yet they look for low interest home loan, working capital and terms loan from other financial institute and gaining more return / interest from their wealth.
Inheritance planning: Smooth transfer of wealth from one generation to next generation is important concern, keeping in view tax requirement and appropriate legal structures.
Tax planning: This is inherent part of any financial decision for any individual. Everybody needs to consider the applicable tax deductibility and post- tax return in their investment.
Ways for HNI to Grow Wealth & Preserve Capital
Make Perfect Debt-Equity ratio
Since HNI has the responsibility of wealth preservation and appreciation, many investors are not comfortable with equity funds because there is a high level of risk. Therefore, they try to diversify their portfolio in such a way that it is less risky and can benefit from the market movement. The combination of Equity Bluechip Fund and Debt Fund can be a better option. A balanced fund is a good option for such investors.
Balanced Investment Funds invest a part in equity and partly in debt. The volatile equity part varies according to market conditions and keep changing, whereas debt part is comparatively consistent in returns. The overall return is defined by the average return on both the equity and and debt part.
Optimum Use of Tax Exemptions in Investment
Although tax savings are one of the objectives of money management, HNI will not receive much relief in the deduction allowed under Section 80C of the Income Tax Act. However, it is better to use tax-saving provisions with investments in instruments such as Public Provident Fund (PPF), National Pension Scheme (NPS), Equity Linked Savings Scheme (ELSS), etc. ELSS is better Tax-saving investment option because it is a form of an equity mutual fund with a lock-in period of 3 years. It gives better returns than other options like PPF and NPS.
PPF account can now be opened in any private and government bank. The maximum amount invested in PPF for one year is Rs 1,50,000, while the lowest is 500. Investors must invest in at least Rs 500 every year in the account. The period of PPF is 15 years and lock-in period also. This is a small window for HNI, but it can be used for tax saving purposes.
High Reliance On Fixed Income Assets
Government and corporate bonds are playing important roles in wealth management. The bonds offered by the government are risk-free and secured because the government is not usually the default on the payment. On the other hand, corporate bonds are bonds offered by large corporates in place with a solid business model. There is little risk in corporate bonds in the event of bankruptcy. But more or less, the bonds are almost risk-free and secure.
The Good Old Real Estate Investment
HNIs like real estate. It’s an immovable asset which is very safe and gives a nice return time over time. However, for the last few years this sector has only disappointed investors. Most market pundits call it a more asset class, which is somewhat true. At this time, the market is not showing any appreciable trends in this area. In addition, the real estate sector suffers from many controversies, corruption and malpractices. In recent times, the government has started tightening the scope of the real estate sector as it is the center of money laundering activities. However, the main cause of widespread skepticism in this area is the fear of lower economic development and less future development.
However, the economic development of the government and the focus on the real estate sector play an important role in this. So one can expect that the sector will bounce back because the government has started entities like RERA which will maintain proper dealing in the real estate sector. Apart from this, various initiatives like smart cities will give investors an opportunity in this sector. But still, investors should be careful while investing in real estate at this point.
Direct Equity Investment
Direct equity investment is the smartest and dynamic form of investment. It has the ability to provide uncrossed growth. However, in equity investment, there is high risk. In addition, direct equity investment is a time-consuming process. One has to spend a lot of time in research and analysis of potential stocks and have to run through various checks like identifying company valuation and determining its development potential. Not all this, some skills are also necessary to take time and excel in equity. Needless to say that HNI and ultra high net worth will not have the enough time and necessary skills to get the benefit from investment in equity. But they can participate in equity with the help of services such as portfolio management services or stock advisory firms, where their role is limited to bringing only capital.
Investment in Startup
A decision by the Central Board of Direct Taxes (CBDT) of India has made it easier to invest in startup for high-net worth individuals. On May 24, 2018, CBDT gave full financial freedom to the angel investors on their equity investment in small startup above their fair value. So far, in 2012, on the basis of the budget, issued by former finance minister Pranab Mukherjee, investors were taxed by 30% on the value of the shares issued above their fair value. It was earlier used to prevent money laundering and to sell shares at a higher price for the purpose of taking bribe. However, it discouraged Angel investors from buying shares at a premium, unlike venture capital funds and foreign investors, who benefited from the tax rebate for the same transaction. The premium received by these startups from Angel investors for their equity was classified as “Income from Other Sources” and accordingly tax was levied. Therefore, many startups were not able to get enough money to grow and compete for investment from the VCs. As a result of the new ruling, angel investors will be given the same treatment for tax purposes, as venture capital funds. It is expected to encourage high-net worth individuals and promote significant growth in the startup funding scenario in India.
Investment in Gold, Diamond, Precious Metal & Gems:
It is observed that in long run the price for Gold, Diamond, Precious Metal and Gems are appreciating significantly. This is the best and safe choice for HNIs to park their money in less risky form. After several years of consolidation, gold prices are consolidating and gradually moving higher. Gold is perhaps the oldest and the most durable asset known to mankind. It is a natural hedge against both inflation and uncertainty. In the disruptive times that we are living, gold certainly provides us the comfortable hedge against the various uncertainties surrounding us. Karvy has recently added two products in its HNI portfolio. HNI Investors can now take active positions in diamonds in both physical and paper format.
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