HNI Investments

High Net worth Individuals or HNIs get special services from financial institutions due to the high value of transactions and high security

HNIs or high net worth individuals is a class of individuals who are distinguished from other retail segment based on their net wealth, assets and investible surplus. While there is no standard put forth for the classification, the definition of HNIs varies with the geographical area as well as financial markets and institutions.

As per a report, even amidst gloomy economic outlook, India recorded the maximum growth in its ultra high-net worth individual population amongst BRICS nations in the last one year reaching at 7,850 super-rich individuals. It has also been reported that India is home to the highest number of women millionaires when compared with rest of the world with total fortunes to the tune of $95 million.

This boom in the HNI population in India was mainly on account of positive trend in the stock market, real estate, gross national income, consumption and capitalisation. For the purpose of determining the ultra high-net worth individual status, the study encompassed only individuals with a net worth amounting to $30 million or more.

The classification is done in view of the risk appetite of such investors who need to be guided well in the allocation of their funds. Private banks, mutual funds, investment banks, commercial banks, insurance companies, brokerages cater to HNIs by providing wealth management services. Broadly speaking, HNIs should manage their wealth portfolio by assessing and working on following parameters that include investments, capital protection, tax planning, credit and inheritance planning.

Managing a high net worth individual's (HNI) account is a lucrative job for any wealth manager. After all, the stakes involved are high and the sums involved are huge.

According to the 2011 Asia Pacific Wealth report from Merrill Lynch and Capgemini, high net worth individuals' (HNIs) wealth in India grew by 22% in 2009-10 accounting to $582 billion ( 28.4 trillion). India's HNI population grew to 1.53 lakh from 1.27 lakh during the same period.

Looking at this huge growth and future potential, every intermediary is keen to grab a share of this growing pie. A number of brokerages, banks or boutique firms are expanding their reach beyond the metros by entering Tier II and even Tier III cities. So how do these HNIs choose their wealth managers?

"HNI needs are very different as compared to normal investors. Besides traditional products such as equities, mutual fund and insurance, HNIs may also need business funding, or advice on succession planning or formation of a trust.

They would consider things like capability and reputation of the organisation/wealth manager, bouquet of products on offer, before selecting a wealth manager," says Sunil Mishra, CEO, Karvy Private Wealth.

Why HNI needs are different

"A general investor's first priority is tax planning, followed by child's needs and financial planning to meet goals such as buying a home or a car or an overseas holiday," says Rajev B Sharma, an independent wealth manager. Basic products such as mutual funds, bonds and insurance would often help meet these needs.

However, in the case of most HNIs, many would have met these goals and would be looking beyond these. So HNI needs could include the likes of buying a property in Dubai, buying a structured product, picking up a stake in a promising or upcoming business, funding a real estate project through debt or could be even looking at the idea of buying into a distressed asset, or writing a complex will.

"These needs are far different from investment needs of a regular retail investor. Hence, they need someone with greater depth, understanding and necessary skill sets to meet these needs," says Rajesh Saluja, MD & CEO, ASK Wealth Advisors.

Choosing an organisation

Choosing a wealth manager is not an easy task, given that the wealth management industry in India is fragmented and highly unregulated. Since all big brokerages along with private banks as well as foreign banks offer wealth management, making a choice gets that much tougher.

Given the busy schedule of most HNIs, it is important to choose someone who can devote time and attention to minute details and handle things with confidentiality. The task becomes all the more difficult since wealth management firms do not have any audited or published performance report in the public domain. Hence, HNIs have to rely on their own judgment or seek references.

Larger organisations may have an edge since they can offer in-depth research and views from the best analysts in the industry. Smaller organisations may score on account of their flexibility and ability to offer personalised service to their customers.

Organisations have different ways of classifying HNIs. Some foreign banks ask for higher threshold levels, while some banks may call you an HNI if you have 50 lakh in deposit, or a brokerage house may call you an HNI if you hold more than 10-lakh worth of stocks in your portfolio.

Heard of Leveraged Trade, leveraged investment etc... here is leveraged deposits for interest rate arbitrage
In a crisis…it pays to be an NRI
 RBI's makes changes to FCNR deposit rules. 
Raghuram Rajan announced last week that banks can swap dollars raised through FCNR deposits for rupees at a fixed swap rate of 3.5%, much lower than the market rate of 7-8%. The RBI, in an earlier move had also liberalized interest rates on FCNR deposits fromLIBOR + 300 bps to LIBOR + 400 bps.  Analysts forecast that $10-15 billion dollars would flood in on account of these moves. That’s fantastic - it helps us bridge our current account gap and supports the tumbling rupee.
But does it also given an enormously unfair advantage to wealthy Non-Resident Indians on the returns they earn?
Reports suggest that foreign banks like Citi, DBS and Standard Chartered are providing 90% - 190% leverage to their clients, depending on risk profile and will be rolling out upfront loans this week. This basically means if a client wants to invest $100 in an FCNRB deposit, the bank is willing to deposit $900 to 1900 on the client’s behalf in an FCNR account enabling the client to earn interest on not just his $100, but also the bank’s loan. This effectively gives the NRI a return of between 20-40% on his investment as we will see.  
This when Indians are earning a measly 8-9% on FDs!
Here’s how it works –
Mr. NRI wants to invest $100 sitting in Singapore. As he is an ultra HNI client, XXX Bank agrees to loan him $1900 at a rate of 1-2% over LIBOR (works out to around 2.5%).

He takes this $2000 and parks it in an FCNR deposit which yields him an interest rate of about 4.5%. The NRI effectively makes 2% (4.5%-2.5%) on his leveraged component and the entire 4.5% on his own equity – i.e. – he makes $4.5 on his $100 and 38 dollars on the bank’s $1900 loan.

That’s a return of $42.5 on his $100 investment – i.e. 42.5%
Even if you assume that the leverage is $900 dollars – i.e 90%, you are stil getting a return of $4.5 + $18 – ie. $.22.5 on your $100 – that’s a 22.5% return.
One way of looking at this is – it is getting us the much needed dollars. But resident Indians would say while the wealthy NRI is laughing all the way to the bank, the Indian investor battling a prolonged bout of inflation & earning peanuts in real returns, with even his last guard against inflation – gold made costlier, is being left high & dry!

Portfolio Management Services(PMS) vs Mutual Fund. 
Like chartered flight Vs public carrier...both of them can raise and can fall but PMS allows to do that at your own terms

"PMS offer customised equity options, but you should have a large fund for that," says Debashish Mallick, managing director and CEO of IDBI Mutual Fund. PMS are offered by banks, brokerages, independent investment managers and asset management companies.

PMS were a big hit before the 2008 market crash but faced accusations of misuse. Many were not registered and indulged in heavy churning. After that, the Securities and Exchange Board of India, or Sebi, introduced stringent regulations. Among other things, it raised the minimum investment limit from Rs 5 lakh to Rs 25 lakh. It also banned pooling of accounts of different investors.

The investor and the portfolio manager enter into an agreement detailing the investment strategy, goals and other details. The investor can offer either a sum of up to Rs 25 lakh or stocks worth this much. PMS are offered on discretionary as well as non-discretionary basis. In the former, the manager takes investment decisions and has the power of attorney to manage the investor's demat account. In nondiscretionary, he merely suggests investment ideas; the rest is the investor's prerogative.

PMS' closest competition is mutual funds. Both differ in terms of working, fee, Sebi regulations and risk-reward profile. While the main aim of PMS is offering customised services, many brokerages offer investors the choice of different model portfolios. "In this, the service providers have different model portfolios such as large-cap and mid-cap. Investors choose depending upon their needs," says Sandip Sabharwal, CEO of portfolio management services at Prabhudas Lilladher. These models define in which stocks the money will be invested.

In PMS, investors hold stocks, whereas in mutual funds they hold units. In PMS, the investor can know which stocks he is holding at any given point in time by logging in to his demat account. This is difficult in case of mutual funds.

The investor can negotiate the fee with PMS providers, unlike in mutual funds. "Most PMS charge a 2% annual fee and get 20% profit beyond a hurdle rate," says Prateek Pant of RBS Private Banking, which offers non-discretionary PMS.

The hurdle rate determines at which level profit-sharing will take place. For example, a 12% rate means the PMS provider will get 20% profit above 12%. "If the hurdle rate is not met, one may end up paying less than what mutual funds charge," says Pant of RBS Private Banking.

However, investors negotiate for a lower fee if the assets to be managed are big. Mutual fund fees are fixed in percentage terms.

While many PMS providers offer standardised portfolios, some offer investments tailored to clients' goals. For instance, a client may want to invest a large amount in a single stock. This is not possible in mutual funds, as they cannot hold more than 10% net asset value in a single stock. While this spreads risk, a big disadvantage is that mutual funds cannot hold a big stake in a company even if it is a very good investment. PMS do not have this limitation.


While many PMS providers offer standardised portfolios, some offer investments that are geared to meet clients' specific goals

The performance of mutual funds is in public domain. For PMS, you will have to take the provider's word. This is because different PMS clients have different objectives and want different strategies. However, it is easy to get a performance report card in case of a model PMS portfolio.

However, Prabhudas Lilladher's Sabharwal offers a way out. "To know the performance record, you can ask for details of a couple of other clients for reference checks," he says.

Unlike mutual fund managers, PMS managers are directly accountable to the client, who can seek clarifications, especially in the discretionary portfolio.

"You can look at PMS if you are getting services that are really customised. But how many portfolio managers can offer you such a service?" asks Mallick. In today's competitive market, PMS providers need more clients and so prefer to offer mass pre-fabricated products.

But what about PMS offered by asset management companies or AMCs? "PMS of AMCs don't make much difference as they offer products that are similar to their mutual funds schemes," says a portfolio manager who offers non-discretionary services.