HNIs may face credit risk as they increasingly invest in fixed income

Over the last few years, the stock markets have been bearish, giving little to no return on investment

Most High Networth Individuals (HNIs) are increasingly investing in fixed income and seeking yield because the experience with equity over the past few years has not been good.

“The usual long only approach and power of compounding has not worked in equity for some time now, due to which HNIs are not comfortable building up positions in equity. Currently, clients are seeking yield,'' says Anshu Kapoor, Head-Global Wealth Management Edelweiss.

As HNIs increasingly invest in tax free bonds and corporate bonds issued by public sector companies and non-banking finance companies, they are getting exposed to credit risk, which they don't understand as well as equity risk. Exiting risky fixed income investment is not as easy as in equity.

“As HNIs continue to seek yield there is a risk of them getting exposed to 'not so good' credit,” Kapoor points out.

Most HNIs are also over allocated to real estate assets like real estate and gold. In real estate, the preference has shifted from residential to commercial, because of the higher yields offered by the latter. While residential property offers yields of 2-4%, in commercial real estate it can be as high as 7-9%.

Another new asset class that is offering HNIs an opportunity to seek yield is commodity. Here, there are arbitrage products that offer returns as high as 12-14%. The risk to capital is also very low in such products, Kapoor says

With regard to equities, investors should watch out for volatility, which will continue to be an issue, going ahead. “Equity markets will be volatile for the next 12-24 months  because of global events and India's political uncertainty. It is advisable to switch out of long only positions and move to structured products, which will offer principal protection,” he adds.