Managing money for high net-worth individuals is a complex task that needs access to various resources, asset classes and constant monitoring.
As wealth increases, the needs evolve; from plain vanilla reactive investment strategies to active oversight and scientific planning.
Historical data indicates clearly that no one asset class tends to perform consistently over a long period of time. Therefore, to curb volatility and achieve targeted returns, an individual must spread his wealth not just across asset classes, but also across management styles.
Unique Requirements
Today, sophisticated investors have access to various asset classes like equity, debt, private equity, real estate, structured products, insurance, commodities etc.
Investments can be done in a variety of styles such as discretionary and non-discretionary equity, concentrated portfolios, diversified portfolios, long only, conservative, hedged, arbitrage, growth, value, etc.
Every individual has unique requirements based on appetite for risk, ability to tolerate volatility and cash flows. Additional needs of asset preservation and handover to the following generations adds a layer of customisation and complexity to the process.
While attempts have been made to broadly classify investors according to their financial planning needs, the market has been evolving constantly.
The growing maturity of the players and evolving regulations are giving birth to newer opportunities. Let us look at some of the newer developments in the product space.
Today a substantial part of the investors' portfolio is on Indian shores. As regulations permit and structures develop, we will increasingly see investors demanding geographical diversification to minimise country risks. This will not only mean geographical access to global markets but also access to more cutting-edge structures that fulfill possible risk-reward gaps in the portfolio.
While a few years back Indians had restricted access to global markets, today regulations permit investors to route large amounts through global access mutual funds and limited amounts directly.
Investment strategy
These products offer investors geographical diversification, access to emerging markets across the world or could also offer asset class diversification for example; a global gold fund. These enable the investor either to reduce volatility or simply attempt to outperform.
Sometimes existing products may or may not be enough to meet every gap in the portfolio.
At such times, the smart manager needs to access sophisticated products that are structured specifically for the individual needs.
A structured product is generally a pre-packaged investment strategy, which is based on derivatives, such as a single security, a basket of securities, options, indices, commodities, debt issuances and foreign currencies.
A unique feature of some structured products is a 'principal guarantee' function, which offers protection of the principal, if held to maturity. Structured products can be used as an alternative to direct investments, as part of the asset allocation process is to reduce risk exposure of a portfolio or to capitalise on the current market trend.
For example, today's HNIs have access to structures that outperform the benchmark on the upside and protect capital on the downside.
Private Equity
The last but amongst the most interesting opportunities that HNIs can benefit from is the alternate space, this is predominantly in the form of private equity.
These opportunities may be in broad sector agnostic funds or in targeted verticals such as real estate and infrastructure.
While these alternates hold the promise of larger returns, they come along with their share of risk and long lock-ins ranging from 7 to 12 years.
At the same time, the funds try to achieve higher IRR through structured draw downs and profit bookings that are paid to investors on realisation before the final wrapping up of the fund.
These options are definitely for the larger investors and smaller investors may well be advised to exercise caution. Thus, we see that, as wealth increases, the complexity only increases. Managing money is a fulltime activity that requires trained professionals, who understand both: the high net-worth individual as well as his wealth management need, to achieve a fine balance.
After all…it takes all ingredients to make a perfect recipe.
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