Who is a High Net-worth Individual (HNI)?
HNI is referred as a High Net Worth Individual (HNWI).
Definition: HNI is an individual with a considerable net worth. While the exact threshold may vary, an HNI in India is typically defined as someone with investable assets exceeding INR 5 crore. These individuals are usually entrepreneurs, business owners, corporate executives, successful professionals, or inheritors of substantial wealth.
Private wealth managers prioritise working with high-net-worth individuals (HNWIs) due to the complexity involved in managing and preserving their increasing wealth. HNWIs demand personalised services in investment and estate planning, tax planning, and other financial areas, justifying higher fees. They may qualify for separately managed investment accounts instead of traditional mutual funds based on specific requirements set by financial institutions.
HNWIs enjoy benefits like reduced fees, special rates, and access to exclusive events unavailable to individuals below the HNWI threshold. These privileges cater to their unique financial needs and investment goals. Financial advisors, private banks, and wealth management firms play a crucial role in providing specialised services and expertise to help HNWIs achieve their financial objectives.
Types of HNIs in India
The following are the types of HNIs in India:
- High Net Worth Individuals (HNIs): Investors with investable amounts between INR 5 lakh and INR 5 crores.
- Very High Net Worth Individuals (VHNWIs): Investors with investable amounts between INR 5 crore and INR 25 crores.
- Ultra High Net Worth Individuals (UHNWIs): Investors with investable amounts of more than INR 25 crores.
How do HNIs Manage Wealth?
HNIs employ diverse strategies to manage their wealth, encompassing investment management, tax planning, and estate planning.
- Wealth management is a holistic approach that integrates strategies with risk management, retirement planning, and more.
- Investment management plays a central role in HNIs’ wealth management. They collaborate with wealth managers or investment advisors to devise and execute investment strategies that align with their financial goals and risk tolerance. HNIs often access specialized investment opportunities, such as hedge funds, private equity, and venture capital, which offer higher returns but entail greater risks.
- Tax planning constitutes another significant aspect of wealth management for HNIs. They engage tax professionals to minimize tax liabilities by capitalizing on deductions, credits, and other strategies. This may involve establishing trusts or other tax-efficient structures to transfer wealth to future generations.
- Estate planning holds equal importance in HNIs’ wealth management. They work with estate planning attorneys to develop strategies for tax-efficient wealth transfer to future generations while ensuring adherence to their asset distribution wishes.
In essence, effective wealth management for HNIs necessitates a comprehensive approach involving multiple strategies and the expertise of professionals such as wealth managers, investment advisors, tax professionals, estate planning attorneys, and philanthropic advisors.
Investment Options for HNIs in India
With a large portion of investable amounts, HNIs have diverse investment options. The following are popular investment options available for HNIs:
- Private Equity: Investments in privately held companies, exclusive to accredited investors like HNIs. They can be risky but offer potentially high returns.
- Hedge Funds: Hedge funds employ various strategies for generating investor returns. Typically available to accredited investors due to their risk and high minimum investment requirements.
- Real Estate: HNIs can invest directly in properties or indirectly through REITs or real estate funds. Real estate investments offer potential capital appreciation and rental income.
- Art and Collectables: HNIs may include art and collectables in their investment strategy. These alternative assets offer potential returns but carry high risk and limited liquidity.
- Structured Products: Complex financial instruments tailored for HNIs, providing exposure to stocks, bonds, and commodities.
- Venture Capital: Investments in start-up companies in exchange for ownership. While it is a high-risk option, venture capital can potentially yield significant returns.
- Private Debt: Private debt provides funding to companies or individuals in exchange for regular interest payments. Private debt investments offer stable income.
- PMS: Portfolio Management Services (PMS) offers customised solutions managed by professional portfolio managers. PMS aims to generate better returns than the market, tailored to individual parameters such as risk appetite, return expectations, investment objectives, and timeframes.
- Market-Linked Debentures (MLDs): MLDs are debt instruments linked to specific underlying assets like equity indices, currencies, or commodities. NBFCs issue MLDs with fixed maturity periods. MLDs offer diversification but also carry risks like credit and liquidity risks.
- Unlisted Shares: Unlisted shares (pre-IPO stocks) are stocks that can be bought and sold over the counter. These do not trade on the stock exchange. Investing in unlisted shares allows early access to innovative organisations focused on technology and unique business concepts.
Risks and Challenges Faced by HNI Investors
Despite the wide range of investment options available to HNIs, following are risks and challenges faced by HNI investors:
- Market Risk: HNWIs face volatility and potential losses due to investments in financial products like hedge funds, structured products, and private equity funds that are influenced by market fluctuations.
- Liquidity Risk: Illiquid alternative investments such as private equity and real estate can pose challenges when HNIs need to access their funds quickly.
- Regulatory Risk: HNWIs may invest in unregulated products, exposing them to fraud, mismanagement, and unethical practices.
- Concentration Risk: HNIs with a significant portion of their wealth concentrated in a single asset or investment face potential risks from poor performance or unexpected events.
- Operational Risk: HNIs are vulnerable to operational risks such as fraud or theft, leading to significant financial losses.
- Complexity: The complexity of investment options available to HNIs makes it difficult to assess risks and potential returns accurately.
- Taxation: HNIs encounter complex tax issues related to investments, including capital gains, estate taxes, and gift taxes.
To mitigate these risks, HNIs often rely on financial advisors and investment managers to guide them and to help diversify their portfolios.