<p><em>A growing population of the uber rich is infusing money into the overall economy<br><br><strong>By Rajesh Iyer</strong></em><br><br>In keeping with the general good cheer after the formation of a strong government at the Centre last year, the number of ultra high net-worth individuals (UHNIs) in India is increasing rapidly, which bodes well for the overall economy.<br><br>According to Kotak Wealth Management’s Top of the Pyramid 2015 report, the number of UHNIs (Rs 250 million onwards) in India is estimated to have grown by 17 per cent in FY15 to 137,100 and their combined net-worth is estimated to have increased to Rs 128 trillion. An increased allocation towards risk assets within their investments reflected the boost in the optimism towards a strong economic recovery.<br><br>Equity markets in India have been on a roller-coaster ride this year. After reaching all-time highs during March this year, the Sensex and the Nifty have corrected by more than 12 per cent from their peaks on account of global concerns. Prior to last fiscal, the previous five years were a very tough phase for equity investors with markets staying almost flat from their previous peaks of 2008. At the same time, fixed income was offering fairly good returns given the high interest rates, which led to a significant re-allocation from equities to debt in UHNI portfolios.<br><br>However, since last year, we have seen the risk appetite of Indian UHNIs increasing with a significant rise in equity allocation in their financial portfolios. This increase has been primarily based on expectations that with the government enjoying a strong majority at the Centre, significant reforms will be introduced to bring the economy back on track. The change in debt mutual funds taxation in 2014, where the holding period for long-term capital gains taxation was increased to three years from one year earlier, has also contributed to restricted inflows into debt mutual funds.<br><br>Within equities, the preferred sectors for investment have been banking and infrastructure. Also, both open-ended and close-ended mid-cap oriented funds have seen large inflows in the past one year, reflecting the increasing comfort with Indian equities. Private equity and venture capital investments have also grown over the past year, where technology (information technology and e-commerce) has been a preferred sector — in line with the overall buzz of e-commerce companies.<br><br><img alt="" src="http://bw-image.s3.amazonaws.com/3d-gold-bars-and-coins-shutterstock-lrg.jpg" style="width: 650px; height: 272px;"><br><br>Another asset class that has seen a reduced allocation in the financial portfolio of the ultra rich is gold. Gold has traditionally been considered a safe haven, providing a hedge against the highly volatile equity markets. With equity markets remaining almost flat from 2008-2013, gold as an asset class had seen a significant interest from the rich. However, with the allocation shifting more towards riskier assets in recent times, the allocation to gold as an investment avenue has also reduced.<br><br>Physical real estate has traditionally been a favourite amongst the ultra rich. Perceived lower risk than comparable asset classes in the long-run is a big driver of investments in this asset class.<br><br>According to Top of the Pyramid 2015 report, over 90 per cent of UHNIs have exposure to real estate investment in addition to their primary residences. They also purchase offshore real estate in locations like London, Dubai and Singapore, either to make second homes in cities they frequent or as holiday homes. Although residential real estate remains a favourite amongst UHNIs, higher rental yields associated with commercial real estate has led to an increased interest towards that space also. Recently, there have been concerns raised by several experts that the real estate market in India is over-heated and the prices might see some correction going forward. However, we still haven’t seen a shift from real estate towards equities, which is also probably because of the illiquidity associated with such assets.<br><br>Another noticeable shift over the past few years has been that a growing number of the ultra rich are now employing the services of professional wealth managers to manage their wealth. UHNIs find it difficult to manage and monitor their investments themselves due to lack of time, and have started appreciating the benefits of managing their investments using a systematic approach, which a professional wealth manager brings to the table.<br><br>The global concept of ‘family office’ has also picked up pace in India where in addition to managing investments, professional wealth managers also assist large families with their non-investment requirements such as accounting, philanthropy, concierge services and succession planning, among other services.<br><br>All in all, there is a wave of optimism, and the mood and sentiment of the rich is positive. Increased investment in equities is a good proxy for the rising buoyancy and this is expected to get better in the coming years, once economic growth picks up. Most experts believe that the Indian equity markets are still a good bet from a long-term investment perspective although there might be temporary volatility in the markets on account of certain global risks. However, it is very easy to get carried away when the going is good and go overboard on investment into a particular asset class. Thus, it is always important for investors to select their ‘strategic’ asset allocation across equities, fixed income, real estate and other alternate asset classes based on their risk profile. Investors, who follow a systematic approach to investing, are less likely to be influenced by emotional factors, and hence, are also able to weather the crisis better during turbulent times.<br><br><em>The views expressed in the article are personal. The columnist is Head , Investment Advisory Services & Family Office, Kotak Wealth Management</em><br><br>(This story was published in BW | Businessworld Issue Dated 16-11-2015)</p>
