Can equities, mutual funds and real estate satiate the investment needs of ultra-high networth individuals and high networth individuals (HNIs)? The answer may differ across individuals, depending on each one’s risk-taking appetite. HNIs are classified as people with an investible surplus of at least $1 million (Rs 5 crore) and more.
According to experts, India follows China, with a rapid rise in wealth among the middle class. The number of billionaires in that East Asian country and India is swelling every year.
Wealth managers say the rich are looking at smarter asset classes, because they understand their potential and requirement that goes beyond their passion for it. Though India has higher opportunities, HNIs look at offshore investments keeping a deflationary environment in mind.
Apart from the yellow metal and properties, the rich have started looking at investment avenues in agriculture, commodities, coal mining, healthcare and dairy farming. Experts say these investments add significant value and offer appropriate diversification to a client’s overall portfolio.
Here are a few next-generation asset classes the ultra-rich look keen on. But they should be cautious on not over-exposing themselves to these unusual investment avenues.
In the recent past, wealth managers have advised clients to invest in food processing companies or even buy farms and land. Increasing wealth in China and India is having a lasting impact on food prices. A growing economy has accelerated demand for vegetable, oils, meat and other essential processed food items. Since these investments are exotic, HNIs should be careful while investing.
This investment theme has witnessed a lot of interest, with a large number of educational institutes mushrooming and schools being backed by wealthy trusts. Education has always been a favourite asset class, as making investments is not very complicated there. HNIs, who like this theme, take exposure in tutorial institutes the private equity route. “If not funding a school or college building, they may just take some stake in the trust associated with it,” says Richa Kapre, director-investments, Alta-mount Capital. “Being an exotic investment, it offers returns in the range of 20-25 per cent.”
The latest buzz is that HNIs are going ahead and buying coal mines via co-investment opportunities in private companies. HNIs can invest in these ventures, in which their wealth manager already holds a stake. They refer to minority investments (as small as two to five per cent). One can either invest in a coal mining company or buy a coal mine directly. Co-investment helps clients plunge in those risky assets, which they couldn’t afforded independently. Co-investments in mining equipment and service providers, besides transport sectors with a focus on rail and shipping, can also form a good portfolio.
In India, the prices of milk and milk products like cheese, ghee and butter, are up 70-100 per cent in the past eight years. Wealth managers foresee the demand for these products to increase another 55 per cent in the next 10 years. “With the growing population of India and its limited capacity for additional production, we see potential benefits of investing in agriculture,” says Rohit Bhuta, chief executive, Religare Macquarie Private Wealth. Also, clients do show interest in this theme, but they introduce it only to sophisticated clients who understand offshore markets, he adds. Investments are made in companies that process milk and related products.
At a time when equity markets are uncertain, commodities are gaining the favour of HNIs. More so because these have a negative correlation with equities. Hence, it works as a good portfolio diversifier. For instance, the price of guar gum has more than quadrupled in the past year, while the Sensex has lost 1.3 per cent. HNIs have been trading more on kesar, soya, corn and guar gum. “They give huge arbitrage and trading opportunities and offer returns of around 15 per cent,” notes Rajesh Iyer, head (products and research), Kotak Wealth Management. These commodities perform well, as they have a huge demand globally and are scarce in nature.