Investment Tools With Touch Of Luxury

When HNIs and UHNIs explore investment options in equity, their portfolios often reflect a blend of sophisticated and high-ticket assets. The choices available to them include direct equity, mutual funds, portfolio management services (PMS), alternative investment funds (AIF), and structured products. However, these decisions are frequently taken based on the status of exclusivity rather than mathematical evaluations. 

HNIs tend to gravitate toward presitigious sounding investment products like PMS and AIFs mainly because the ticket size is premium without factoring the high cost they are paying for the exclusivity or the tax impact with is a very cruicial point of contention for HNIs and end up distrupting the longterm return potential of their portfolio.

Testing Investors
HNIs, like any other investors, face market downturns that test their portfolios. The Covid-19 pandemic and the global financial crisis in 2008 are two stark reminders of how severe market collapses can affect the portfolio values. Nifty 50 had crashed by 40 per cent during Covid-19 and by 60 per cent in the 2008 crisis. Fear and panic during these downturns led to redemptions from equity mutual funds and investors had lost their confidence in the market which made it difficult to re-enter at favorable levels.

The challenge of navigating such catastrophes highlights the need for diversification and risk mitigation strategies. Structured products can serve as a hedge, ensuring that portfolios don’t take as deep a hit, allowing investors to hold on through turbulent times.

The Importance of MFs
Unlike retail investors, HNIs have a larger investment size and it is extremely important to diversify the fund as much as possible so that especially during a downturn, the entire portfolio is not hit. And mutual funds offer the most convenient way to diversify across asset classes, market caps, and investment strategies. With consistent alpha generation potential across various categories, mutual funds not only provide growth but also protect your portfolio during market downturns.

By combining the right balance of large-cap stability, mid-cap growth, and small-cap potential, along with strategy-based funds like contra and focused funds, mutual funds give investors the luxury of diversified exposure with professional management.

How to diversify?
Investors can diversify their portfolios by choosing from the 15 mutual fund categories, six of which are based on market capitalisation. An ideal allocation across large-cap, mid-cap, and small-cap funds in a 50:20:30 ratio is ideal, ensuring exposure to funds that have demonstrated consistent alpha generation and performed well in various market cycles. With strong economic factors like GDP growth, controlled inflation, and liquidity supporting the mutual fund industry, investors can focus on categories that offer both alpha generation potential and downside protection. 

Our analysis of the past six years, highlights the performance of these categories in outperforming their respective benchmarks and the Nifty 50. For HNIs, mutual funds provide a versatile, professionally managed, and tax-efficient investment option. By incorporating mutual funds into their overall investment strategy, HNIs can efficiently achieve their financial goals while maintaining the flexibility to adapt to market dynamics.

Why Diversify?
Equity provide long-term growth, however, it comes with its own set of risks. Even though the Nifty 50 has delivered annualised returns of 11 per cent-12 per cent over the long term between 2001-2024, there are periods where returns have fallen below this average. During these times, it’s not uncommon for investors to lose faith and look for alternatives.

For HNIs looking to maintain a balance of luxury and financial prudence, structured products present an attractive option. These products if designed well can deliver returns of 14-15 per cent per annum, offering higher returns than traditional debt products while keeping risk in check. This is significantly higher than the 6-7 per cent per annum typically offered by debt products. 

Structured products while slightly more volatile than debt, are considerably less risky than direct equity investments. When combined with equity mutual funds, a structured product can create a portfolio that not only mitigates the downside but also enhances long-term returns. A portfolio comprising 65 per cent equity mutual funds and 35 per cent structured products can outperform traditional portfolios with 35 per cent debt. However, while investing in structured products, one needs to be very careful and understand the design of the product.

Example: During the Covid-19 pandemic when Nifty 50 corrected 26 per cent, a portfolio with 35 per cent structured products only fell 12 per cent. Thus, the ability to weather downturns makes structured products a luxurious yet sensible choice for long-term wealth preservation and growth.

Mutual funds and structured products offer that luxurious blend of exclusivity and performance. These instruments, when used thoughtfully, can ensure that HNIs achieve not just higher returns, but also stability during market downturns, preserving their wealth and legacy.

The author is the deputy CEO of Anand Rathi Wealth, a listed company, in the business of Private Wealth, catering to HNIs