THE TIMES OF INDIA, MUMBAI TUESDAY, JULY 2, 2013

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THE TIMES OF INDIA

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HNIs Bank On Debt Mutual Funds Amid Volatility

Rich investors look for tax advantage, stay away from equities, gold for now
TNN

Wealthy investors eye cash flows

ndia, like the rest of the world, has been witnessing a lot of volatility in recent times and not limited to equity only. Commodities, currency, bonds, real estate, private equity all asset classes have witnessed a roller coaster ride over the past few years. The sliver lining in this volatile investment environment has been increased awareness about risks associated with returns in each investment class. Investors today are far more aware of investments they make in terms of the risk they are taking as also the other relevant characteristics pertaining to the products like liquidity constraints, cash flow plans, investment patterns etc. Basically , the smart money has now stopped the singular objective of chasing returns and has become more mature and balanced. They have started discussing and looking at the concept of asset allocation. As investors mature, we have observed that some clear trends have emerged as favored asset classes for investments by them and what they want from their investments. We find that investors today want greater visibility of cash flows where profits are distributed to the investors and not retained within funds. They want lesser lock-in periods with more control on their liquidity positions, preservation of capital has assumed importance over growth of capital with more focus on defined inflation-beating returns than uncertain yet probable higher returns. The current trend is also towards creating hard assets like real estate, and surprisingly less of gold. With such clarity of require-

ich investors, also referred to as high networth investors or HNIs, are usually financially savvy and can also avail of the services of the best wealth advisors, managers and financial planners for a fee. Globally, retail investors always look up to such wealthy investors for cues to where one can invest and how to do that. Although it is not easy to copy the portfolio of the best of rich investors because they are secretive, it is possible to get some hints about how they are investing, the asset classes they are more comfortable with at the current market and the ones they are not so interested in. Most HNIs are very much glued to the latest happening in the market and so are well ahead of the curve while deciding where their investments should head towards. At present, among various asset classes, investing in debt products, mainly through the mutual fund route seems to be the flavor of the season. While equities are not so favoured by HNIs, gold investments, of late, have seen a muted response. HNIs are also very selective while investing in real estate, financial planners and wealth advisors said. An important trait among almost all the HNIs is their eye for post-tax returns. For HNIs, tax efficiency of the products they invest in is very important. So entering through the debt mutual fund route, which gives investors some tax advantages, is very popular among the wealthy people, said Hemat Rustagi, CEO, Wiseinvest Advisors. However, since most HNIs are well aware of the investment products and their attributes, they do not invest in all types of debt funds. Rather, they are very selective on this front also. For the past several months, a good part of allocations are going into long-term debt funds, said Nipun Mehta, founder & CEO, Blue Ocean Capital Advisors. Of

ments and return expectations, debt-oriented investments have become the dominant asset class, and it has been further compounded with the tailwinds in this asset class over the last few years as compared to the head winds in equity . Within debt, investors have traversed the entire risk spectrum starting from debt mutual funds, tax-free and AAA-rated bonds at the lower end to high yielding real estate-linked debentures involving developer funding on specific projects at the other end.

Illustration: Mahesh Benkar

late, fixed maturity plans (FMPs) have lost flavour to some extent. However, funds are being allocated to dynamic bond funds and income funds, while allocations to gilt funds are still limited, Mehta said. Wealth advisors and financial planners said that relatively FMPs are less favoured now because of some fall in the rates of interest in the last one year or so, while dynamic bond funds are preferred because of the uncertainties about the rate movement going forward. HNIs prefer these funds also because they

dont want to lose the chance of making some extra money from capital appreciation if rates really go down over the next few months. HNIs are also banking on duration strategy in the debt segment for extra gains and also use the double-indexation methods efficiently for smart gains, Rustagi said. Double-indexation method is a process, allowed by the Income Tax laws, where the returns are adjusted for the rise in inflation and taxes are paid on the inflation-adjusted return rather than the full appreciation.

Another trait among HNIs is their aversion to trading for shortterm gains. They mainly invest for the medium to long term. Although, financial planners and advisors say that for the past 4-5 years, allocations by HNIs to equities and gold as a percentage of portfolio allocation have been almost stagnant, incremental allocations are going into debt. Advisors and wealth managers to HNIs said that since debt mutual funds have done well over the last few years, so that has naturally benefitted these rich investors suitably .

In the debt mutual fund category , the trend is clearly towards duration play to capture the rateeasing cycle as also short term income funds to capture high accrual. Through direct bond exposure, investors are looking at locking in at the prevailing high rates for the longer term with the added benefit of regular cash flows through coupon payments.

GURUSPEAK
Investors with higher risk appetite are taking the route of developer funding to generate the extra yield in their portfolios; however, given the enhanced risk one advocates limiting exposure to 5-10% of debt allocation, and that too diversified through professionally managed funds. In-

terestingly , from longer term equity investment into real estate funds or projects, HNIs are clearly moving towards shorter term defined return, regular couponlinked debenture structures - be it through a fund route or through project specific debentures, even if the overall returns expectations are lower. Apart from financial investments, the biggest gainer as an asset class has been real estate - the traditional favorite of all Indian HNIs. Real estate has delivered handsome returns to most of the investors in the past few years and the trend continues to be supported by regulatory constraints, limited supply, favorable demographics and tax advantages. One sub-segment that has emerged in real estate is pre-leased commercial properties, given that these properties are currently undervalued, rental yield is comparable to fixed income instruments with regular cash flow and the potential for capital gains as and when the economy turns around. This has clearly been the trend since the last meltdown, but our view is that in next few years one can see a completely different story . The cause of the entire meltdown was the fall of US economy which led to a series of events and, therefore, an investment trend emerged. If the US economy starts to grow and the US Federal Reserves easy money policy (popularly QE3) is gradually reduced, it will be very interesting to see how investors and asset classes react globally. For all you know, the next five years may belong to equity , if the US growth is supported by action on the ground by the future Indian government. The writer is head, private wealth management, ICICI Securities

Balanced asset allocation is key to wealth creation in long term

C
an you help me invest in real estate? was a call I received two years back. It was from Rakesh Gupta (name changed), working with a multinational company . Gupta (34) was lured towards real estate as he was tired listening to stories as to how his friends and collegues made a killing by investing in the same. We do not give advice on a particular asset class unless we first do a thorough analysis of your financial position and goals, I replied. Gupta enrolled with us for a comprehensive financial planning. Guptas annual package was Rs 28 lakh with Rs 1.8 lakh per month in hand. He is married: his wife is a home maker and the couple have a child, Aryan (6). They live in a selfoccupied property with a Rs 60-lakh outstanding loan, on which they pay an EMI of about Rs 63,000. His monthly family commitments and expenses are about Rs 57,000. He had insurance policies, all traditional endowment plans where he paid an annual premium of Rs 2.36 lakh. They went on an annual vacation every year and would spend about Rs 1 lakh on it. He invested Rs 20,000 through mutual fund SIPs and an EPF balance of Rs 10 lakh. His savings account balance was approxiare five basic asset classes that one deals with in financial planning: tEquity: That generates an inflation-plus return in the long run. However, it could be volatile in the short term and should be looked for asset creation only when money has to be accumulated over several years. t Debt investments: These, like like fixed deposits, PPF, etc., are relatively more predictable compared to equities. However, not all debt investments give guaranteed returns. On several occasions, they can generate returns below the rate of inflation (CPI). So, if too much of money is parked in debt instruments, your wealth might actually not grow compared to inflation. tGold/silver: Although in India no portfolio seems complete without this asset class, this is basically meant to ensure liquidity and gives a flavor of stability in the portfolio. So a 5-10% allocation is fine, but over-allocation can put one again in a risky situation. tReal estate: In India, often financial success is measured in the number of properties one owns. But the truth is financial success and owning property has no correlation. This asset class is good but not regulated and appreciation is always known only in hindsight. Moreover, it is an extremely illiquid asset and often one cant sell a property when needed the most. We made the following suggestions to the Guptas: tTake a term plan for Rs 1.5 crore for a 25-year term and a personal health insurance cover. tHave bank FDs of Rs 8 lakh for future contingencies a nd liquidity covering up to six months. tSurrender all existing endowment-oriented insurance policies and pay off a part of the outstanding loan after taking the term plan. tIncrease EMI to Rs 80,000, which will reduce the loan term by seven years. tStart an RD for Rs 8,000 per month to fund yearly vacations. tStart an investment of Rs 5,000 in a debt fund for the child delivery expenses in the future. tStart an SIP in a large-cap oriented mutual fund for Rs 33,000 for retirement planning. Our constant endeavour and follow-ups have brought the Guptas to a point of semblance. He agrees he may not be the wealthiest, but on a Monday morning, he goes to his office with a smile. The writer is founder , MSVentures Financial Planners

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eople look up to celebrated billionaire investor Warrant Buffet for his insights into how one can invest and make money in the long term. Next week we will look at what the Sage of Omaha teaches us in simple terms that can make you a better investor.

mately Rs 8 lakh. He wanted to make provision for Aryans present and future education, and wanted to buy a property which will fund this goal. He plans to have another child soon and retire at 58.

CASE STUDY
It drew up a financial plan and presented it to him and his wife together. Since we believe not just in making financial plans, but also educating the client, so we also briefed them about each asset class and how they were different and how we understand which ones suited them and which ones did not. There

Benefi t from active sector allocation. # EnJoy tax -free dividend & long-term capita l gains.
per prevailing tax laws .

What is duration in bond market?

Swatantra Kumar explains: The term duration, in the context of bond market and debt mutual funds, is meant to measure the number of years it would take for the principal (that is the price) of a bond to be repaid to its holder. One should know that higher the duration, higher the risks associated with a bond. So with higher risks, the bonds with longer duration usually pay a higher rate of interest.

MYTH BUSTER
MYTH: An average investor can never invest
like rich people do.

The product is suitable for investors who are seeking * :

Long term capital growth

Investment in equity instruments by capitalizing by on opportunities arising in the market dynamically High risk (Brownj-investors understand that their principal will be at high risk
in

I
UTI M u t u a l F un d

REALITY: This is not true. Rich people invest

with greater knowledge and also they are
usually very disciplined about their investments. These are two of the main reasons why they are rich. They can make their money work harder. So as a retail investor, one should try to acquire good knowledge about investments from every possible source. Also one should be very disciplined about his/her investments. And above all, like the rich, one should also invest with a long-term view.

*lnv tors should consult their fi nancial advisors if

doubt about whether the product is suitable for thern

Notes Risk may be represented ass (BLUE)in VaStOIS understand that their pflncipal will be at low nsk

(YELLOW) investors understand that their principal will be at medium flak

(BROWN) investors understand that their prim cipal will be at high ririsksk

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Mutual Fund investments are subject to market risks , read all scheme related documents carefu lly.