Street smart in tough times

Street smart in tough times

Street smart in tough times

India's high net worth individuals are heavy on gold and real estate but have kept currency out of their investment plans as they look beyond equities to maximise their returns. Other than going long on gold and cutting deals in the real estate space they have entered the private equity space. Some of their more defensive strategies include investing in short-term debt instruments and structured products with capital protection.

HNIs are tapping opportunities in the realty space in countries like the US, UK and Singapore. Some are even scouting for houses in debt-ridden Spain and Greece, part of euro zone. This is because many houses abroad have become dirt-cheap after the financial meltdown. In the US, some houses priced at half a million dollars in 2006-07 are now available around $200,000. "Many HNIs with children studying in the US are used to paying $2,000-3,000 per month on rents; so they are saying why not buy a house," says Maneesh Kumar, MD, Burgeon Wealth Advisors. Under the Liberalised Remittance Scheme of RBI, every resident individual can remit up to $200,000 overseas every year.

Gold is in vogue as well. HNIs are purchasing gold through exchange traded funds and physical gold and through international gold funds. The Gold Harvest Scheme is a popular route where one buys gold by paying interest-free installments along with the rollover cost. The biggest advantage here is that HNIs can get delivery of gold, say, 1, 2 or 3 years later at the price fixed today. "Gold is seen as a hedge against currency and inflation risks. Plus, it is liquid," says Ajay Bagga, head (private wealth management), Deutsche Bank.

According to him, gold has historically given returns near to or slightly above inflation. Year-on-year, gold is up 24% in dollar terms and 23.1% in rupee terms. If global markets continue to remain tumultuous, gold may rise further, feel experts.

Investing through private equity (PE) is gaining ground as well. "This is mainly because PE funds have reduced the ticket size of investments to about Rs 25 lakh. Earlier, the minimum amount was in crores," says Rajev B Sharma, country head (wealth management), Unicon.

HNIs are investing in PEs by becoming limited partners or directly co-investing in projects. Alternatively, the PE might approach institutional investors like banks, which will issue a tranche to the PE for the required amount and then approach individual HNI customers for funds.

Not all HNIs are gung-ho about taking the PE route, though. "This is because the lock-in period is longer at 5-7 years and transaction costs are substantially higher," says Bagga.

And those who do not have the patience for long-term bets are turning to short-term, liquid and fixed return products. HNIs typically earn 4-5% p.a on short tenure fixed deposits, 5% on liquid mutual funds and 6-6.5% on short-term mutual funds. "Cash is now king for HNIs and they are looking for stability and protection of capital," says Bagga.

HNIs are also investing in company deposits with tenures below six months. Rates for some of these short-term company deposits could be as high as 9-11%p.a. "Because of market volatility as well as higher perceived risk with corporate FDs, HNIs are less inclined to lock in their money for an extended tenure," says Kumar of Burgeon Wealth Advisors.

Lower graded debt instruments are also on the radar. "Even though these instruments may not have a high credit rating, a credit-enhancing mechanism can offer additional comfort for HNIs. The promoter usually offers company shares as collateral," says Vishal Kapoor, general manager (wealth management), Standard Chartered India.

Debt syndication deals too are gaining currency. A lender (bank, NBFC, etc) lends to a promoter against shares. The lender then issues a debt instrument representing obligation to repay the loan in the form of a unitised debt paper sold in units. The shares are used as security. These unitised papers are sold to HNI investors with permission of the borrower promoter. "HNIs can hope to earn 12-15% returns through these deals," said Mohit Batra, Group CEO, Alchemy Capital Management.

HNIs are looking at structured products with a capital protection component. Such schemes are essentially a mix of debt and equity with a coupon attached that guarantees a minimum rate of return. These help to participate in the upside of the market while protecting the downside. Even for these products, clients prefer staying invested for a shorter period ― the investment tenure has come down from 3 years in 2006-07 to 18-24 months nows. "Structured products are typically not very leveraged, have a scientific base, are less risky, generally have a strict stop-loss and are based on the customer profile," says Sharma of Unicon.