India’s ‘Exotic’ Investment Avenues Poised To Remain Attractive For HNIs

India’s demographics are changing fast and this change is making a significant behavioral impact across the spectrum. Ultra-high net worth individuals (UHNIs) are also party to this ride – globally and domestically over the last 10 years. In India, HNIs are growing exponentially and they are younger, tech savvy and give high importance to service. The patterns have also shifted – be it spending or investments – from traditional to exotic.

The growth of UHNIs…
To put things in perspective, the global population of UHNIs has grown by 60 percent in the last 10 years, according to research by wealth intelligence firm, New World Wealth. There are now 187,500 UHNIs with $30 million or more in net assets, excluding their principal residence, around the world. This figure is up 61 per cent from 116,800 in 2005. India has been an outstanding performer and one of the top contributors to this growth. The number of UHNIs grew by an enormous percentage of 340 per cent in the last 10 years, and the growth is expected to be in 3-digits over the next decade too.

Preferred asset classes…
With changing times, investor behaviour has evolved, with clients now not afraid to tap into unconventional investment avenues to boost returns. Not only does this result in financialization of asset classes, but also helps in deriving new solutions. New products across different asset classes are available, and have gained substantial traction over the last year.

Multi strategy Funds: Opportunistic long and short investments
While traditional mutual funds have shown growth in AUMs under various schemes, a lot of other asset classes have also cropped up. FY16 witnessed growth of 14 per cent in mutual funds assets to Rs 13.5 lakhs crore. HNIs are looking for avenues where they can select an option best suited to their risk-return profile. Hedge funds and AIFs in this respect have come up with multi-strategy investment schemes. Along with providing absolute returns using long only strategy, they also take opportunistic short positions to take advantage of inefficiencies of the market.

Investments in CAT III alternate investment funds stand at Rs 4,000 crore at the end of first quarter of FY16, up by 140 per cent from last year.

Structured Products
Another class of investments is structured products, which consist of market-linked investment strategy. HNIs who invest through this route, look for features that cannot be obtained by investing the traditional way – in stocks and bonds. Structured products provide capital protection against dips in the market, and also bet on directional movements.

Financialization of real estate
Coming to real estate, investors currently are clearly showing an aversion to investing directly in residential projects. Instead, we see their preference leaning towards investing in the asset class, via non-convertible debentures issued by reputed developers, and through credit-based AIF funds. Investments made in CAT II alternate investment funds increased by 146 per cent year on year to Rs 14,000 crore till the end of the first quarter of FY16. With REIT norms easing and RERA getting implemented, investments in real estate are expected to go up significantly, by around 25-30 per cent.

Investments in startups
And last, but by no means the least, with the steady rise of investment activity in the start-up space, HNIs also want a piece of this pie – either through direct investment or private equity/venture capital funds. In the first half on 2016, start-ups in India have raised $2.1 billion through 559 deals, according to research by YourStory. However, more than $719 million was raised from April to June alone, across 260 deals. This is a 40 per cent decline from the same period in 2015, when start-ups raised $3.5 billion across 380 deals. Though many HNIs have realized the potential of this asset class, there is a lot of scope to increase awareness. The investment parameters are completely different, as compared to other instruments. PE/VC funds come with high risk and high return potential, but the longer time horizon and illiquidity risk needs be taken into consideration before investing.

Going forward: India and the world
All in all, it is clear that exotic products are here to stay, given the interest they have been able to attract from HNIs. Product providers and private wealth arms now need to create awareness about these products and create further customization, to satisfy specific needs of HNIs. Technology will remain the top differentiator for many businesses across sectors to drive wealth growth.