" 7,97,714 Indians had an asset value of USD 1 Million and more in 2022. And yet, the number is expected to rise to 16,57,272 by 2027."
- According to Knight Frank
Stunning, right?
Well, these people are categorised under the term ‘High Net Worth Individuals’ or ‘HNIs’. You would know if you are one! Even if you don’t, reading this blog will help you understand.
Investments for HNIs are different from that of non-HNIs. The prime differentiator is that with a huge amount to invest, HNIs need to have a more careful and strategic investment plan before starting off. Owing to this, they are usually offered personalized services by banks and financial institutions for all kinds of financial products.
But, where do they really invest?
Let’s find out in this blog.
Who Is a High-Net-Worth Individual (HNWI)?
What comes to mind when you hear the term High Net Worth Individual (HNI)? It's likely to be a group of people with luxurious cars, extravagant mansions, exotic vacations abroad, prestigious education from top-tier universities, and so on, isn't it? Well, all of this is true. What's also true about HNIs is that they are driven by the idea of building wealth and increasing their net-worth day by day. How do they do it? We'll find out soon.
High Net Worth Individuals (HNIs) are broadly defined as individuals with an investment capacity exceeding five crores. As these HNIs increasingly turn to the real estate market and equities for generating and multiplying their income, we can observe a significant shift in market trends.
Investment Opportunity For HNIs
High-net-worth individuals (HNIs) typically enjoy a wide array of investment opportunities, including:
Private Equity: HNIs can invest in private companies not listed on public stock exchanges. These investments are usually limited to accredited investors. While they carry risks, they can yield substantial returns.
Hedge Funds: Accredited investors, including HNIs, can access hedge funds that employ various strategies to generate investor returns. Due to their high risk and minimum investment requirements, hedge funds are typically exclusive.
Real Estate: HNIs have the option to invest directly in properties or indirectly through real estate investment trusts (REITs) or real estate funds. Real estate investments offer potential for capital appreciation and rental income.
Art and Collectibles: HNIs may diversify their portfolios by investing in art, collectibles, and other alternative assets. These investments can yield high returns, but they also carry risks and may lack liquidity.
Structured Products: HNIs can explore structured products tailored specifically for them. These complex financial instruments provide exposure to various assets like stocks, bonds, and commodities.
Venture Capital: HNIs can fund start-up companies in exchange for an ownership stake through venture capital investments. Although these investments involve high risk, they can yield substantial returns.
Private Debt: HNIs have the opportunity to invest in private debt, where they provide funding in return for regular interest payments. Private debt investments offer a steady income stream and may carry lower risk compared to other alternative investments.
Risks and Challenges For HNIs While Investing
While high-net-worth individuals (HNIs) enjoy various investment options and financial opportunities, they also encounter risks and challenges. Here are the details:
Market Risk: HNIs often invest in complex financial products like hedge funds, private equity funds, and structured products, which are highly sensitive to market fluctuations. These investments can be volatile and result in substantial losses.
Liquidity Risk: Illiquid investments, such as private equity and real estate, can pose challenges for HNIs when they need quick access to their funds.
Regulatory Risk: HNIs sometimes invest in lightly regulated or unregulated products, exposing them to potential fraud, mismanagement, or unethical practices.
Concentration Risk: HNIs may have a significant portion of their wealth tied up in a single asset or investment, which becomes risky if the investment performs poorly or unexpected events occur.
Operational Risk: HNIs face operational risks like fraud or theft that can lead to significant losses.
Complexity: Many investment options available to HNIs are complex and difficult to comprehend, making it challenging to evaluate risks and potential returns.
Taxation: HNIs encounter complex tax issues related to investments, such as capital gains taxes, estate taxes, and gift taxes.
To mitigate these risks, HNIs often work closely with financial advisors and investment managers who offer guidance and help diversify their portfolios. They may also invest in insurance products like umbrellas and professional liability insurance to safeguard their assets and income streams.
Why Real Estate is the best way of investment for HNIs?
In addition to offering a steady income over time and the potential for asset value growth, real estate can be considered an excellent investment option for high net worth individuals (HNIs) due to the following key factors:
1. Real Estate provides Long-Term Financial Security:
- Investing in real estate ensures you have a steady cash income for a long time.
- It's a great way to gain financial rewards over an extended period.
- If your goal is to be financially independent and secure your future, investing in real estate can help you achieve that.
2. Real Estate allows you to claim Tax-benefits:
- Real estate investments come with tax benefits, which makes them even more appealing.
- For example, in India, rental income is not subject to self-employment tax.
- You can also claim eligible tax deductions for expenses like property taxes, professional fees, travel costs, repairs, and maintenance.
- Additionally, you can deduct depreciation costs from your gross income, reducing the amount of tax you need to pay on your net income.
3. Real Estate is Usually Less Sensitive to Volatility:
- Real estate is a more reliable choice because it has a lower correlation with stock market movements.
- During a recession, stock markets and alternative assets like crypto trading can experience rapid declines.
- On the other hand, real estate tends to move more slowly, making it a good option for stability.
4. Real Estate is Improvable:
- One of the unique advantages of real estate is that it can be improved.
- With some effort and investment, you can increase the value of a property made of tangible materials like wood, brick, concrete, and glass.
- Whether you do the repairs yourself or hire professionals, the principle remains the same: you can make your real estate worth more than before.
5. Real Estate Coincides with Retirement:
- Real estate can be seen as a kind of forced saving program for retirement.
- Initially, the cash flow may be lower due to mortgage payments, but as time goes on and the mortgage is paid down or paid off, the cash flow increases.
- This makes it a perfect long-term investment plan for retirement, as it provides a steady income stream over time.
6. Real Estate has a low Tax-rate:
- If you sell your real estate investment after a year, the gain is typically subject to a lower capital gains tax rate.
- This rate, usually between 15% to 20%, is often lower than your regular tax bracket.
- Considering this, real estate has the potential to increase your net worth compared to other asset classes, and it allows you to keep your funds invested for a longer period.
7. HNIs have attractive real estate investment options:
- High net worth individuals (HNIs) have access to appealing real estate investment options, including residential and commercial properties.
- These investments offer the potential for attractive returns.
Real estate tends to yield more stable returns and can significantly increase the value of their investment over time.
Advantages Provided to High Net Worth Individuals (HNWIs)
If you are classified as a high-net-worth individual (HNWI), you may be eligible for financial services such as banking and investment with lower fees, discounted rates, and special privileges. HNWIs have the opportunity to invest in hedge funds, which are typically exclusive to accredited investors meeting specific requirements, including a minimum net worth.
Additionally, HNWIs can invest in private equity (PE) and venture capital (VC) funds, which are not open to the general public. They also have access to real estate and other alternative assets that are typically unavailable to the general public.
These benefits and opportunities vary depending on the financial institution and region.
Too Long, Didn’t Read
In a nutshell, being a high net worth individual (HNWI) in India comes with its own set of advantages and challenges. HNWIs have access to exclusive financial services, investment opportunities, and alternative assets that are not readily available to the general public.
They can enjoy personalized banking services, and invest in hedge funds, private equity, real estate, art, and collectibles, among other options. However, HNWIs also face risks such as market volatility, liquidity concerns, regulatory uncertainties, concentration risk, operational risks, complexity, and tax complexities.
To navigate these risks, HNWIs often seek the guidance of financial advisors and investment managers who help them diversify their portfolios and mitigate potential losses. They may also invest in insurance products to safeguard their assets and income streams.
Overall, being an HNWI in India opens up a world of opportunities and advantages, but it also requires careful management of risks and proactive planning. With the right strategies in place, HNWIs can effectively preserve and grow their wealth while navigating the complexities of the financial landscape.
