India is experiencing exponential growth in the population of ultra high net worth individuals (UHNWIs), with an anticipated increase of 80% over the next three to five years, as per reports.
This growth is attributed to businesses monetising their assets and land holdings. New-age entrepreneurs and senior professionals too are contributing to this pool of increasing UHNIs as they realise the value of their holdings in their companies.
As a result, many new family offices have emerged to manage the wealth of growing UHNWIs across metro and smaller cities of India.
The investors’ perceptions and understanding of capital markets evolve as they move up the wealth cycle.
To understand how investment patterns have evolved over the past few years, it is important to take a step back into the pre-pandemic era. Worldwide and in India, inflation was at its lowest, with USA’s pre-covid 20-year average inflation being at 2.1% and India’s inflation in 2019 at 3.7%.
These low inflation periods forced a fall of interest rates and the pandemic observed reserve bankers loosen their monetary policies. This resulted in a drop in rates through 2020 and 2021.The US Fed rates dropped to 0.25% and RBI repo rates fell to 4%, with global bankers pumping enormous liquidity into individuals and businesses on the back of pandemic woes.
This low-rate environment pushed investors to seek higher returns, leading to a change in their investment thought process. As a result, UHNWIs moved from debt to equity, alternates, and even crypto.
Additionally, commodity prices rose and all asset classes prices reached new highs, including real estate demand, as UHNWIs bought luxury homes across the globe.
However, while pushing up growth globally, inflation reared its head, causing many central bankers to taper off the flow of money and withdraw excess liquidity.
Interest rates were increased to tame inflation. Yet, inflation peaked globally, and the US saw multi-decade high inflation of 9.1% while in India we saw CPI touch 6.7% in 2022.
Fed raised rates by 450 basis points to 4.75% while RBI raised rates by 250 basis points to 6.5%. In 2022, high inflation and interest rates caused global growth expectations to drop, with equity markets falling to factor-in slowing growth and even possible recessions in a few large, developed nations. Bond returns and commodity prices fell, too.
Globally, Russian equities fell 51% followed by China at 45%. Bond returns, too, plunged as yields soared. A low-rate situation typically pushes investors to seek out higher returns. This pursuit for increasing yields leads to a change in their investment thought process.
Available surplus money then tends to seek out the highest returns possible. However, now with corrections across all markets and asset classes, UHNWIs are looking at 2023 as a year of opportunities, with many family office clients reducing cash exposure to grab opportunities in the listed equity space.
With yields remaining high and downside limited, money is flowing into target maturity funds, Bharat Bond ETFs, high-yield, and performing credit funds.
The Budget of 2023 has withdrawn the tax benefits on Market Linked Debentures, leading UHNWIs to look for higher-yield options like structured credit and venture debt funds.
In recent years, UHNWIs and family offices have actively participated in the private equity space — investing in start-ups beginning from Angel investing to pre-IPO opportunities.
There is a preference for single opportunities that rank at par with institutional investors as opposed to blind pool private equity funds. New-age and tech-oriented promoters with wealth generated through private- and public-market exits have a larger allocation to private equity.
The next-gen in family offices are more active in analysing such opportunities as they understand the tech-led business environment better.
Global investing has become a priority for families seeking to maximize their annual limit of $250,000 per individual. However, many portfolios of UHNWIs lack this essential component. To combat this gap, more UHNWIs are now taking global investing seriously.
They are now diversifying their portfolios with market-neutral strategies, differentiated stocks, ETFs, direct bonds, and other assets.
Despite the recent increase in tax collected on source on LRS remittances from 5% to 20% in the Budget 2023, we believe that global investment will constitute 15-20% of a client’s portfolio over the next 3-5 years.
Additionally, there is a growing interest in investments that provide residency in foreign countries such as the US, Portugal, and Dubai.
We are also witnessing a trend toward rebalancing equity portfolios between Mutual Funds and PMSs, as UHNWIs increase their exposure to mutual funds to take advantage of issues like taxation, paperwork, and custody.
The year 2022’s volatility and drawdowns have made UHNWIs and family offices realize the importance of strategic asset allocation, diversification, and staying invested.
As a result, many UHNWIs and family offices now have an Investment Policy Statement, and large families have a Family Office Governance Charter with outside members on their Investment Committee.
(The author is Managing Director – Family Office & Portfolio Analytics at LGT Wealth India)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
As a result, many new family offices have emerged to manage the wealth of growing UHNWIs across metro and smaller cities of India.
The investors’ perceptions and understanding of capital markets evolve as they move up the wealth cycle.
To understand how investment patterns have evolved over the past few years, it is important to take a step back into the pre-pandemic era. Worldwide and in India, inflation was at its lowest, with USA’s pre-covid 20-year average inflation being at 2.1% and India’s inflation in 2019 at 3.7%.
These low inflation periods forced a fall of interest rates and the pandemic observed reserve bankers loosen their monetary policies. This resulted in a drop in rates through 2020 and 2021.
The US Fed rates dropped to 0.25% and RBI repo rates fell to 4%, with global bankers pumping enormous liquidity into individuals and businesses on the back of pandemic woes.
This low-rate environment pushed investors to seek higher returns, leading to a change in their investment thought process. As a result, UHNWIs moved from debt to equity, alternates, and even crypto.
Additionally, commodity prices rose and all asset classes prices reached new highs, including real estate demand, as UHNWIs bought luxury homes across the globe.
However, while pushing up growth globally, inflation reared its head, causing many central bankers to taper off the flow of money and withdraw excess liquidity.
Interest rates were increased to tame inflation. Yet, inflation peaked globally, and the US saw multi-decade high inflation of 9.1% while in India we saw CPI touch 6.7% in 2022.
Fed raised rates by 450 basis points to 4.75% while RBI raised rates by 250 basis points to 6.5%. In 2022, high inflation and interest rates caused global growth expectations to drop, with equity markets falling to factor-in slowing growth and even possible recessions in a few large, developed nations. Bond returns and commodity prices fell, too.
Globally, Russian equities fell 51% followed by China at 45%. Bond returns, too, plunged as yields soared. A low-rate situation typically pushes investors to seek out higher returns. This pursuit for increasing yields leads to a change in their investment thought process.
Available surplus money then tends to seek out the highest returns possible. However, now with corrections across all markets and asset classes, UHNWIs are looking at 2023 as a year of opportunities, with many family office clients reducing cash exposure to grab opportunities in the listed equity space.
With yields remaining high and downside limited, money is flowing into target maturity funds, Bharat Bond ETFs, high-yield, and performing credit funds.
The Budget of 2023 has withdrawn the tax benefits on Market Linked Debentures, leading UHNWIs to look for higher-yield options like structured credit and venture debt funds.
In recent years, UHNWIs and family offices have actively participated in the private equity space — investing in start-ups beginning from Angel investing to pre-IPO opportunities.
There is a preference for single opportunities that rank at par with institutional investors as opposed to blind pool private equity funds. New-age and tech-oriented promoters with wealth generated through private- and public-market exits have a larger allocation to private equity.
The next-gen in family offices are more active in analysing such opportunities as they understand the tech-led business environment better.
Global investing has become a priority for families seeking to maximize their annual limit of $250,000 per individual. However, many portfolios of UHNWIs lack this essential component. To combat this gap, more UHNWIs are now taking global investing seriously.
They are now diversifying their portfolios with market-neutral strategies, differentiated stocks, ETFs, direct bonds, and other assets.
Despite the recent increase in tax collected on source on LRS remittances from 5% to 20% in the Budget 2023, we believe that global investment will constitute 15-20% of a client’s portfolio over the next 3-5 years.
Additionally, there is a growing interest in investments that provide residency in foreign countries such as the US, Portugal, and Dubai.
We are also witnessing a trend toward rebalancing equity portfolios between Mutual Funds and PMSs, as UHNWIs increase their exposure to mutual funds to take advantage of issues like taxation, paperwork, and custody.
The year 2022’s volatility and drawdowns have made UHNWIs and family offices realize the importance of strategic asset allocation, diversification, and staying invested.
As a result, many UHNWIs and family offices now have an Investment Policy Statement, and large families have a Family Office Governance Charter with outside members on their Investment Committee.
(The author is Managing Director – Family Office & Portfolio Analytics at LGT Wealth India)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
