Wealth managers have to do a tight-rope walk to deliver consistent returns to clients, even while managing risk. Business Line spoke to Rajmohan Krishnan, Executive Vice-President, Regional Head - North & South, Kotak Wealth Management to understand what comprises a HNI's (high net worth individual) portfolio today. Excerpts from the interview:
What do the ultra-HNI group of investors look for in terms of the return and the risk they can take?
The number and wealth of the ultra HNIs has leapfrogged in the last decade. We estimate that in the next five years, there would be about 2,19,000 such households, up from about current 62,000 households, and their net worth will grow five times. These investors typically look at protecting their wealth and making real returns. They tend to take a higher risk in their business and want their investment portfolio to comprise of safer assets. They also like to maintain a close control over their assets.
What is your outlook on gold and equities?
We have always advised our clients to invest in gold as a hedge tool and recommended around 5 per cent portfolio allocation to gold. In the last two years, the price of most precious metals, including gold, silver and diamonds, has gone up substantially. However, this will not alter the asset allocation. On equities, we are cautious at current levels and have been investing with a large cap bias. We expect earning growth to be around 18 per cent. The quarterly results are being watched closely for margin compression due to increased commodity prices and generally high inflation.
Do you think it is only speculation that is driving prices of precious metals?
No, actually, all these commodities are scarce and the price of any scarce commodity will go up. Gold has historically been considered a good hedge against inflation. The spike in gold prices is largely due to the uncertainty related to European sovereign debt crisis and troubles in the US economy. Investors, specifically those in the ultra HNI category, invest significantly in gold. They do not consider buying jewellery for investments; instead, they prefer investing in the form of ETFs and bars. We recommend ETFs to our ultra HNI clients, as there is a problem of storage with bars. Gold bars can't be sold in the open market; the seller himself doesn't buy it back.
When investing in gold, should a medium-term investor take price into consideration?
In the past three years, the metal was at a new high at every price; people expected correction, which came, but was insignificant making an investment decision based on price would not have been wise. We, therefore, recommend staggered investment. For instance, take 5 per cent of the investable money and spread it through a year, make a SIP in gold every month. Even in equities, we recommend SIPs.
Are HNI investors postponing their equity investments now?
HNIs have reduced equity exposure and are moving money into debt instruments. They show interest for FMPs that now promise 10-12 percent pre-tax yield. However, they have been buyers in dips and are on a lookout for stocks that can outperform in the medium term.
What is your take on International equities versus Indian equities?
Currently, an individual is allowed to take out up to $200,000; however, this limit is being used only for education, real-estate investment and not for equity investment. Till there is full convertibility of rupee, people will not be gung-ho about international equities. Another reason for this avenue not getting popular is the lack of familiarity on these markets and stocks.
How do you go about your mutual fund recommendations? Do you recommend thematic funds?
We don't recommend focused funds. Instead, we advise only on large cap and midcap funds considering sector funds are too risky and seasonal.We advise stable funds that have a good 10-15 year track record and would expose our client to seasonal investment avenues as they emerge. Our belief is that investors should first protect their capital and then grow their investments.
Do alternative investments draw investor interest now? How do these work? What are the return promises?
There is a lot of interest for specialised funds these days. One specialised category of fund is tine yield fund which is purely a debt fund. Here money is lent to developers and builders and this can generate about 15-16 per cent pre tax returns. But funds have their own expenses — to pay the professionals who manage it. You also pay for the risk because some institution comes in the picture and takes the risk. Thus, the net return to the investor can be a little lower.
Disclaimer: The views expressed in the articles are personal of the authors and do not reflect the views of Kotak Mahindra Bank Ltd.