People who have a considerable amount of net worth are termed as High-Net-Worth-Individuals (HNIs). In India, an individual who has investable assets that exceed the mark of Rs 5 crore is typically considered to be a high-net-worth-individual. In most cases, HNIs are business owners, entrepreneurs, successful professionals, corporate executives, or even those who have inherited a substantial amount of wealth.
Different types of HNIs
Those owning liquid assets that are valued at around Rs 5 crore are known as high-net-worth-individuals.
Very-High-Net-Worth-Individuals (VHNIs) own liquid assets in the range of Rs 5 crore and Rs 25 crore.
Investors who own investable amounts of anything above Rs 25 crore are categorised as Ultra-High-Net-Worth-Individuals (UHNIs).
Private banking services often play a crucial role in managing their financial affairs.
What can HNIs consider investing in?
HNIs, insurance companies, banks, endowment funds, etc., tend to invest in hedge funds. Hedge fund managers take on an aggressive front while investing, adopting methods such as taking up long and short positions in the stock market, buying as well as selling bonds, equities, arbitrage, currencies, securities commodities, and so on. The quantum of wealth involved in this fund is high with investors being able to profit from both a bullish and bearish market. However, do consider the risks involved such as depending on the strategy of the fund manager, the lock-in period required, or even the stress levels that a high expense ratio can bring about.
Private equity funds
As the name suggests, private equity funds are not traded on public stock exchanges but are investments that are made in private companies. Usually, these funds are only available to accredited investors such as HNIs. While private equity funds do include high risk, investing in these funds can also result in high returns.
A recent industry survey revealed that 61% of HNIs and UHNIs are aiming to invest in real estate in 2023-24. HNIs have the option of buying properties directly or investing in real estate funds or Real Estate Investment Trusts (REITs).
Challenges faced by HNIs
Risk of liquidity
Certain investments do not offer liquidity since they are not easy to sell immediately. Investing in real estate is a prime example, and this can be a hindrance for HNIs who need immediate access to their money in times of need.
Risk of market fluctuations
Investing in complex financial products such as private equity funds or hedge funds can be risky since these funds are highly sensitive to market fluctuations.
Given the volume of their investments, HNIs often face tax issues such as capital gains taxes, gift taxes, and estate taxes. For instance, Budget 2023 increased tax collected at source from 5% to 20% on the remittances that are made out of India under the Liberalised Remittance Scheme. This will impact HNIs who are looking to invest in foreign securities.
To face the challenges involved with their investments and mitigate risks, it is advisable for HNIs to take the guidance of financial advisors who can help establish diversified portfolios and also offer other services with regards to private banking and business banking. These advisors also help with investing in suitable insurance products to safeguard the investor’s assets.