Investment Options Can Look Out For High Net-Worth Individuals

Do you find it challenging to choose the best investment options among the overflowing choices available today? If you're a High net worth individual (HNI), you may need some help selecting the right products that align with your financial goals.

In this article, we provide you with a step-by-step guide to methodically evaluate investment avenues based on your risk appetite, liquidity needs, and return expectations.

Understanding Market Risks is the First Step

If you are considering investing your money, it is important to understand the risks involved. The economy can be unpredictable, and things like changing interest rates, inflation, and political tensions can affect how well your investments do. It is easy to get caught up in the excitement of investing, but sometimes, people need to realise the dangers of choosing risky investments.

It is important to keep yourself updated about the economy and financial markets to avoid any financial troubles. You can do this by reading finance-related articles, watching business news, and asking financial advisors who can guide you to make smart investment decisions. By understanding the basics of how the market works, you can secure your investments and ensure sudden changes in the economy do not negatively impact them.

Analyse Investment Horizon and Liquidity Needs

When it comes to investing, it is important to consider the amount of time you want to invest and how much you might need to access your money in the short term. For example, suppose you need access to your money in the near future. In that case, consider investing in products that offer easy access to your money without penalties, such as fixed deposits, savings accounts, and liquid mutual funds.

On the other hand, if you're investing for the long term, you have more options. You could consider investing in less accessible assets like real estate, private equity, or pre-IPO placements, which have the potential for higher returns over a longer period.

It is important to separate your investments into different "buckets" based on how long you want to invest and how easily you need to access your money. That way, you can choose the right investments that match your goals and needs.

Read On: An investment horizon is the length of time over which an investment is made or held before it is liquidated. Analysing short and long-term financial requirements helps HNIs determine the right mix of liquid and illiquid investment options for their portfolio.

Evaluate Return Expectations vis-a-vis Risk Appetite

HNIs need to balance their aspirations for returns from investments with the quantum of risk they are willing to adopt. Generally, higher returns come at the cost of higher risks. For instance, while volatile assets like equities, derivatives, digital currencies, etc., offer high returns, they also expose the investment to more significant swings and capital erosion.

On the other side, fixed-income products like bonds, fixed deposits, etc., provide stable, assured returns but limited upside potential. Alternative assets like private equity funds, pre-IPO placements, and distressed assets typically limit participation to HNIs and institutional investors only but may lock up funds for years altogether.

Therefore, HNIs can invest based on their risk tolerance levels. Conservative investors can choose more fixed-income products, while aggressive investors can opt for more market-linked assets with debt products for safety. Getting this balance right is key to long-term success.

Read On: Risk appetite refers to the degree of uncertainty or potential financial loss an HNI is willing to accept in order to achieve the desired returns. Alignment between risk appetite and return expectations is vital.

Research Extensively Before Committing Big Sums

Before making any significant investments, it is essential to research thoroughly, especially when it comes to complex investment options like derivatives, hedge funds, private equity funds, and venture capital deals. High net worth individuals (HNIs) should pay close attention to various factors like the credibility of the company, its financials, business fundamentals, hidden costs, entry and exit clauses, and legal aspects.

This kind of research requires a lot of time and expertise. Thus, it is advisable to consult with regulated investment advisors who can guide you through the process and provide recommendations based on thorough due diligence. Relying solely on hearsay from friends or acquaintances without proper analysis could lead to poor investment decisions and significant losses.

Read On: Making big investments can be risky and requires careful study and advice from experts to avoid losing money in complicated financial instruments. It is important to be cautious about following the crowd, as copying others can sometimes lead to big problems.

Keep Overall Costs in Perspective

At first glance, many investments may appear lucrative, with higher advertised returns used to hook investors. However, on examining more in-depth, high commissions, management fees, promotional costs, exit loads, etc., can considerably eat into actual investor yields.

For instance, while hedge funds and PE ventures target 20-30% returns, more than half may be appropriated in costs when calculated on a net basis. So, HNIs must analyse returns on an all-in basis, factoring expenses accurately. Comparing net yields provides a realistic picture of selecting optimal investment options.

Read On: Factoring all direct and indirect costs on investments before committing funds provides the true yield picture for HNIs when comparing options.

Evaluate Tax Implications

Taxes on profits earned from financial investments can differ depending on the type of investment. For example, if you make a profit of more than Rs.1 Lakh from stocks that you've held for a long time, you'll have to pay a 10% tax on the gains. Similarly, if you sell a debt fund before 3 years, you'll be taxed at 20%, which can impact your overall earnings.

It is important to consider how taxes affect the money you earn from your investments. You can do this by understanding your tax bracket and knowing about any tax benefits that you might be eligible for. This information can help you make smart choices about which investments to choose and how to balance your portfolio in a way that fits your goals.

Ifp> you need help navigating the tax landscape when it comes to your investments, it's a good idea to seek the advice of a tax expert. They can help you optimise your post-tax returns by planning your investments carefully.

Read On: Tax implications vary by investment type. Evaluating post-tax income for alignment with investor tax profiles can help boost portfolio efficiency.

Review Portfolio Periodically

Wealthy individuals should regularly review and adjust their investment portfolio to keep up with market changes, family needs, and investment goals.

For instance, market corrections and crashes may warrant rebalancing asset allocation to mitigate risks or capture emerging opportunities. Business transformations may necessitate churning out some holdings or adding new ones to keep pace with disruption across industries.

Read On: Periodic portfolio reviews help rebalance, identify opportunities, and realign investments with evolving HNI requirements amidst dynamic markets.

How Should HNIs Structure Their Investment Portfolio?

While individual needs and situations differ, the blueprint below broadly covers the asset mix that HNIs can consider under the guidance of accredited investment advisors:

1. Core holdings (50-70% of portfolio)
   • Fixed Income - Debt funds, AAA-rated bonds, Bank FDs, Sovereign bonds
   • Equity - Large-cap funds & stocks
   • Commercial or Residential Real Estate
2. Satellite Investments (20-30%)
   • Private Equity funds
   • Pre-IPO deals
   • International Equities
   • Sector or Thematic Funds
3. Speculative Investments (<10%)
   • Options & Futures
   • Digital Assets
   • Distressed Assets
   • Startup Ventures

This proposed structure helps balance stability with growth opportunities while addressing liquidity needs prudently at various investment horizons for HNIs.

Conclusion

Managing investments effectively requires HNIs to grasp the macro market context, define their time horizons and risk profiles accurately, rigorously research opportunities, evaluate net returns and taxes judiciously, and review portfolios continually against evolving needs. While building a robust investible corpus is commendable, growing it responsibly by mitigating risks is equally vital for HNIs to secure their financial legacies amidst dynamic market cycles.