Investing: Risk, Return and Wealth Preservation

INVESTMENT
Driven by a slew of factors, the number of ultra HNIs in India has leapfrogged in the last decade or so. And so has their wealth. The average rise in the income of ultra HNIs has been much stronger than that of an average Indian, having grown in the high double digits over the past 5 years due to ESOPs and other innovative salary structures, strong corporate performances, buoyant capital markets, and the considerable return on investments. Around 78 per cent of the Inheritors and 91 per cent of the Self-made There is another aspect that sets the ultra HNIs apart from the average individual. Even though they may be supremely wealthy by normal standards, ultra HNIs carry their unquenchable (corporate) thirst for growing their business into their personal wealth too. But our survey on investment patterns revealed a very interesting dichotomy: as a class, the ultra HNIs uniformly exercise a far greater degree of caution when it comes to their investments compared with the kind of risks they are willing to undertake in their businesses. The difference among them is only in terms of degree, when it comes to risk aversion. So, a businessman willing to bet millions of dollars on purchasing a failing business is unwilling to show the same gumption when it comes to investing his own wealth in riskier asset classes. This is probably because the primary motive, our survey found, behind investment (including, perhaps, tax planning aspects) is legacy for the family, social security and regular income; growth comes later, quite unlike in business, where growth, and not protection, is the chief objective. With the safety of their personal wealth paramount in the minds, it is but natural that many of the ultra HNIs reiterate their desire to maintain close control over their assets. I would rather invest in my own technology-related business or real estate; why should I put money in something where I have no control, one of our respondents commented, when queried about this perceived risk aversion.
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It is interesting to note from our survey that the key source of personal wealth is success in primary business; 72 per cent of the respondents cited it as a key influence on wealth accumulation. This is followed by investment in real estate (63 per cent of the respondents). And there is a tie for the third spot with 43 per cent of the respondents each stating that inheritance and investment in equity were the next key influencers for wealth creation.

cited success in primary business as the major factor. Moreover, for 73.5 per cent of the Inheritors, 58 per cent of the Self-made, and 44 per cent of the Professionals, investment in land and properties has been the key source of wealth. Earlier, inherited and landed assets dominated the wealth landscape; today, it is enterprise and business ownership that have emerged as the dominant source of riches. In India, though, enterprise culture is a more recent phenomenon. Some of the new ultra HNIs are those who have sold businesses and never felt the need to work again. It is not only in the perceived boom areas, such as information technology and telecom, that big money is being made; pharmaceuticals, shipping, manufacturing which are some of the most traditional industries in the world, have also made people wealthy. Not surprisingly, in view of the stated primacy they attribute to protection of wealth, all the three ultra HNI profiles the Inheritors, the Self-made, and the Professionals save nearly a fifth of their total income, and invest close to another one-fifth to multiply their personal wealth. The choice of asset classes, of course, varies, in accordance with the requirement. It depends on what stage you are in your life cycle. For example, if your kids are small, you invest mainly because you have to provide for their education, luxury lifestyle and marriage. Once you

Enterprise, business ownership and a successful career have emerged as the dominant sources of wealth

Inheritors

Self-made

Professionals

100
Inheritance / Rich benefactor

Success in primary business

88

103

29

Investing in land and property

83

65

50

Investing in equity

55

33

59

By diversifying into different / allied business

35

40

13

Income through job / salary

32

97

Consistent saving in low-risk investments

27

15

17

Income from sale of business Agricultural / Tea plantation income

23

33

13

17 5 3

8 3 3 4

Lottery / Gambling Others

ESOPs in the company

67

Note: Indexed to Inheritance income for the Inheritors Source: T.O.P. India - Kotak Wealth & CRISIL Research

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are comfortable having saved enough, then your goals are totally Ultra HNIs invest one-fifth of their income for growing their wealth
But they put a greater proportion back into their business to fuel the engine of wealth creation. This stems from a desire for a sense of control. Most ultra HNIs would rather invest in their own business rather than in instruments where they have no control.

different, one of those surveyed elaborated. This is not to suggest that ultra HNIs are conservative when it comes to investing. Far from it. Vis--vis others, the ultra HNI is generally willing to take more risks in the hope of better returns. The difference, as noted contextually earlier, is only in terms of degree. In recent times, possibly due to increased exposure to a greater variety

28.4%

Investment in primary business

of investment products, many ultra HNIs have displayed the propensity to be more sophisticated in terms of the breadth of their investments. More ultra HNIs are also now investing in vehicles that are generally considered to be at the riskier end of the financial spectrum, such as hedge funds, private equity, structured products and derivatives.

22.4% 20%

Expenses

Of the three, the Inheritors tend to protect their wealth by diversifying their holdings. Inheritors interviewed for the survey indicated that they distribute their investments across asset classes, with a greater emphasis on real estate about 40 per cent and equity

19.7%

Savings

about 30 per cent. Probably because they are very comfortable relying on professionals to run and grow their business, the Inheritors readily take professional advice on their investments. They have teams of wealth managers, chartered accountants, financial planners and

19.3%

Investment for growing personal wealth

lawyers to manage their investment portfolios. The Self-made, on the other hand, deploy the lowest proportion of

6.3% 3.9%
Others

their income on investments to grow their wealth. According to our

Charity / Philanthropy

market research, while both the Inheritors and the Self-made deploy around 19 per cent of their income on investments, the Professionals deploy around 22 per cent. In terms of being involved in planning their investments, the Self-made are also likely to be the most involved, among the three types, in planning their investments, followed by the Professionals and the Inheritors. As they are more comfortable with people rather than organisations, the Self-made develop personal equations with specific chartered accountants, wealth managers, and

Source: T.O.P. India - Kotak Wealth & CRISIL Research

private financial advisors and take their advice.

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Compared with the others, the Self-made also tend to take calculated risks with their investments. For instance, they are likely to have the highest proportion of investments on alternate assets such as private equity stake in businesses. However, they balance such investments with relatively less risky instruments such as fixed deposits and insurance policies. The Self-made largely invest only in instruments that they best understand. God has stopped making land, so property is where one should invest, one Self-made ultra HNI said. Their tendency to take measured risks is also apparent in their choice of real estate assets a mix of real estate assets such as holiday homes, commercial buildings and agricultural land and plantations, apart from apartments and villas. For the Professionals, our survey reveals, social security and regular income are key investing goals. They route three-fourths of their investments into financial assets, primarily equity and debt. They have the largest proportion of investments in equity. The remainder onefourth is invested in real estate, a pattern which they share with the Self-made. Our survey showed interesting trends in the investment preferences and future investment plans of ultra HNIs. The survey compared the assets in which respondents are currently invested in with their investments over the past one year and their planned investment over the next one year. Two trends were noteworthy. 1) 2) There is expected to be a cyclical move away from equities. Respondents expressed a desire to increase their exposure towards alternate or less traditional asset classes, such as hedge funds, private equity, and derivatives.
Source: T.O.P. India - Kotak Wealth & CRISIL Research Real estate Alternate assets 8.5% 11.1% 8.1% 19.3% 18.8% 25.8% Debt Equity 31.9% 31.0% 39.7%

Professionals put the largest chunk of investments in financial assets

Inheritors Self-made Professionals

40.3%

39.1%

26.4%

In terms of the current investment pattern of ultra HNIs, 37.2 per cent of the investable surplus is deployed in real estate, followed by 33.1 per cent in equity, 20.4 per cent in debt and the balance 9.2 per cent in alternate assets. The Inheritors have a distinct preference for real estate with 40 per cent of their investments in this asset class. This is markedly different from the investment pattern of the Self-made and the Professionals who

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currently have just a little over a quarter of their investments in real estate. In terms of the investment pattern a year ago, the Self-made have pruned their real estate investments significantly from 42.7 per cent then to 26.5 per cent currently. Our survey also suggests that regional biases to investment still remain. Wealthy investors in Delhi and Bengaluru are more focused on amassing portfolios of property (Delhi - 50 per cent of ultra HNI

investment is in real estate followed by Bengaluru at 37 per cent) as indicated by their current investment pattern, whereas the ultra HNIs in Mumbai are far more likely to put money in equity (37.2 per cent of ultra HNI investment in equity). Risk averse they well may be, but ultra HNIs can spot an opportunity if they see one. Unsurprisingly, therefore, ultra HNIs of all hues have been drawn to less traditional asset classes, even if they do not quite understand them, given the proliferation of such products in recent times. Hence, the growing popularity of hedge funds, private equity, derivatives and the like. Despite this appetite for alternate asset classes, only around half of the respondents professed confidence in their knowledge and understanding of them.

Land and property hold greater attraction for ultra HNIs in Delhi
Delhi Mumbai Bengaluru

32.8%

Around 55 per cent of the interviewees said they were comfortable

37.0%

Real estate
50.1%

with leaving the more mainstream aspects of personal finance, such as estate planning or retirement planning, to their wealth managers. Risk-return profile of asset classes

Real estate

Real estate

8.8%
Alternate assets

7.9%
Alternate assets

Return

Wealth advisory

Private equity

9.3%
Alternate assets

21.2%
Debt

Mutual fund

Equity

Portfolio management services

22.8%
Debt
Fixed deposit

Bullion

Real estate

17.4%
Debt

Debt

23.2%
Equity

37.2%
Equity

32.2%
Equity

Cash Source: T.O.P. India - Kotak Wealth & CRISIL Research

Risk

Source: T.O.P. India - Kotak Wealth & CRISIL Research

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Ultra HNIs investments in alternate assets to increase

Investment advice from professional sources is most sought after

2009-10 E

2010-11 E

2011- 12 P

55.0% Wealth managers

50.4% Self

Alternate assets

9.5%

9.3%

11.2%

42.7% Friends / Family 39.7% Chartered accountants 34.4% Private financial advisors

Debt

20.8%

20.4%

18.2%

19.1% Media 13.0% CFO 12.2% Broker 9.2% Others 8.4% Lawyers 6.1% Family office Note: Ultra HNIs rely on a multi-profile team of advisors. The percentage values of the various categories therefore do not add up to 100%. Source: T.O.P. India - Kotak Wealth & CRISIL Research

Equity

31.6%

33.1%

30.1%

brokers, chartered accountants, or tax consultants. Also, traditionally, the wealth management market in India was served by those that cross-sold mutual funds and banking products to the rich. One reason for this is structural most of these investments carry a
Real estate

38.1%

37.2%

40.5%

minimum investment that is sufficiently high to restrict them to the top wealth brackets. Another reason is diversification of risk. Adding some private equity, hedge fund or derivative exposure to a portfolio can help to diversify overall levels of risk by spreading it across a wider range of assets. More interestingly, these specific financial instruments are expected to deliver better financial returns and help cushion investors against volatility in the market.

E: Estimated P: Projected Source: T.O.P. India - Kotak Wealth & CRISIL Research

This lack of knowledge is perhaps the reason for the increased willingness to seek advice from professional investment managers. Previously, most ultra HNIs invested in a few asset classes, using local

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Blood thicker than water?

In an era in which entrepreneurship and enterprise are becoming increasingly well-trodden routes to wealth, and in which ultra HNIs such as Warren Buffett and Bill Gates have decided to leave the vast majority of their estate to charitable causes, it may be tempting to conclude that the desire to leave wealth for the next generation is becoming less prominent. Such temptation, our survey indicates, is misplaced. While a minority contended otherwise, the desire to preserve wealth for the future and transfer wealth to the family was fairly universal. And it probably always will be. It is important in case of a family business. You would want your ideals, legacy to continue with your blood only, one of the Inheritors commented. Others were not quite so certain. While one said, Having put in so much hard work on building something, you need to know who will use it finally, another individual was more forthright. My company is a professionally run firm, they can always hire a new CEO, he quipped. Slightly under 60 per cent of the interviewees agreed that they want to make sure they have enough money so that they can pass it to the next generation. This is followed by social security (53 per cent of the respondents) and the need for regular income (47.5 per cent). Our survey suggests that the motivation to ensure financial security for children is the highest among the Self-made, with 65 per cent of them stating it as one of the prime motives for them to create wealth. This perhaps has to do with the fact that they are the first-generation rich.

The Professionals, however, believe that it is not a good idea to leave large sums of money to dependents; only 47.6 per cent of them agreed that leaving a legacy for the family and kids is an important motivation for them. High profile cases aside, philanthropy seems to be only a moderate motivation for investing. For the ultra HNIs who have inherited from a long lineage within their family, they feel (and are often legally) restricted with what they can do with it. As a result, they give very little away. Our survey suggests that less than 15 per cent of the ultra HNIs who have inherited wealth would want to give back to society. Some of them had pretty strong views. I dont believe in donating. My wife though does a lot of charity. I dont believe in it. Instead of giving a fish to eat, teach someone how to fish, you will be feeding him for life, opined one. On the other hand, the Professionals are more likely to shy away from passing wealth to their children; instead they are more apt to spend it during their lifetime, and are increasingly keen to apply their business acumen (and wealth) to the charity sector. Close to 29 per cent of the professionals stated philanthropic causes as a goal for wealth creation and protection. I believe that when you are comfortable you should ensure a few more are also comfortable, one Professional said. For this group, philanthropy has often been based more around giving time rather than money. Further, the tendency to shy from public recognition and a clear desire for privacy characterises these benefactors.

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Legacy and social security are the two most important goals of wealth creation for ultra HNIs as a whole

Inheritors

Self-made

Professionals

Overall

Legacy for the family

60.7%

65.0%

47.6%

59.8%

Social security

54.1%

47.5%

61.9%

53.3%

Regular income

37.7%

70.0%

33.3%

47.5%

Charity

14.8%

15.0%

28.6%

17.2%

Note : As the respondents gave multiple responses, the percentage values do not add up to 100%. Source: T.O.P. India - Kotak Wealth & CRISIL Research

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