Three Common Investing Mistakes That HNI’s Make

The definition of High Net-worth Individuals or “HNI’s” may vary depending upon which private wealth management outfit you’re talking about, but it rings true that collectively, the more moneyed seem to beat risk of making a few seemingly innocuous – but surprisingly detrimental – investing related follies. Here are three or them that recur with uncanny regularity!

Missing the woods for the trees

HNI’s are typically found wanting when it comes to seeing the “big picture” with respect to their portfolios. This tendency manifests in many ways – the topmost being the habit of attaching excessive significance to either tax efficiency or exit loads. Take, for instance, an investor who declined to exit a debt mutual fund with a questionable top holding in a high-default risk housing finance company simply because he wanted to avoid the associated capital gains tax; only to take a 10% hit on his NAV when the risk materialised. Similarly, HNI’s have been found to resist critical rebalancing exercises to circumvent 1% exit loads; after all, 1% of a large sum of 1 Crore isn’t inconsequential. But what if the failure to rebalance resulted in his portfolio taking a 5% knock? 

Oscillating between fence sitting and “investing ADHD”

Very few high net worth individuals seem to be able to adopt a balanced and disciplined approach to their portfolios. We often see them sitting on the fences when it comes to higher risk investments, preferring to fence sit in the haven of short-term Fixed Deposits or even their savings accounts – waiting for the “right time” to deploy money. To make matters worse, this passivity is seen to metamorphize into hyperactivity when the fear of missing out kicks in. This tendency stems from the fact that in large portfolios, the actual rupee value at risk is significant enough to cost even brave investors a good night’s sleep! For instance, 50% of a 20 Crore portfolio would amount to Rs. 10 Crore, and a 20% drop on that would amount to a whopping Rs. 2 Crore! To be able to invest successfully, HNIs must overcome this pernicious habit and calmly focus on asset allocation. Remember, even Billionaire investor Rakesh Jhunjhunwala is reported to be sitting on a near 50 Crore loss in his holding in DHFL alone! Successful investing is about making high conviction bets and seeing them through until something changes fundamentally.

Gravitating towards the exotic

If only we had a rupee for every time the allure of exotic investments did in an HNI investor! The wealthier one gets, the more they seem to want to move away from good old vanilla products like stocks, bonds, fixed deposits and mutual funds and gravitate towards fancier products like structures, real estate funds, private equity funds, art funds, film funds and what not. As history tells us, this is a very questionable move, as a lot of these glossy new investment products end up bombing and leaving gaping holes in investor portfolios. Their large entry ticket sizes only add to their allurement – and associated capital risk. A quick word of advice: tt would be wise to steer clear of any product that cannot be explained to you in 60 seconds flat!