How family offices and UHNIs are evolving their investment strategies in India

Several factors have contributed to this evolution, including a relatively stable economic climate in India, government initiatives promoting international investments, and changes in taxation policies.

These dynamics have played a significant role in stimulating diversification among UHNIs and family offices. To fully understand these changes, it is important to analyse how UHNIs and family offices are allocating their portfolio investments. And given the enormous amounts of wealth involved, this analysis is essential for both investors and the wider economy.

Traditionally, there is a lot of home bias when it comes to UHNIs investment allocation. This trend has been observed due to the benefits of investing in familiar markets, with stable regulations, political stability, and cultural understanding, all of which contribute to a sense of comfort and trust in domestic investments.

However, this conventional approach has been undergoing a gradual shift due to the government’s initiatives such as promoting Gift City, which is India’s first global financial hub, and the rise of digital platforms that have made it easier for UHNIs to explore and invest in international markets.

Such factors have provided UHNIs with greater access to global investment opportunities, which can help diversify their portfolio and reduce risk. As a result, we are seeing a gradual shift towards a more globalised approach to portfolio allocation among UHNIs in India.

There is also a change in attitude towards real estate. Traditionally, UHNIs in India have been heavily invested in real estate (RE) as it historically displayed reasonable inflation-adjusted returns. However, in the last decade, the inflation-adjusted alpha or excess return generated by real estate investments has not been sustained.

This coupled with taxation changes and the announcement in the recent budget of restricting capital gain deduction to Rs 10 crore, will possibly act as a dampener and lead to subsequent shifts in asset preferences. UHNIs are, thus, diversifying their portfolios and investing in other asset classes that provide better returns and diversification.

UHNI investors are increasingly interested in high-yield opportunities that provide inflation protection, particularly in the debt space. This shift towards high-yield investments is primarily driven by the need to achieve better net real returns.

Some of the high-yield opportunities that investors are exploring include INVITs (private and listed), Venture Debt, REITs, and Performance Credit, which have the potential to offer a hedge against inflation due to their potentially high returns and distribution break-up. As a result, investors are actively seeking out these investment options within the fixed-income space.

Meanwhile, on the equity side, a significant portion of investments made by UHNIs and family offices in India continue to be in the form of listed equity, which is invested through various financial products like Portfolio Management Services (PMS), Alternative Investment Funds (AIFs), mutual funds, and direct stocks.

These products are primarily geared towards High-Net-Worth Individuals (HNIs) due to their higher investment threshold. And in terms of growth, PMS products have seen an impressive year-on-year growth rate of approximately 23.2%, resulting in current Assets Under Management (AUM) of around 4.89 lakh crores not considering institutional contributions. In comparison, AIFs have witnessed an astonishing compound annual growth rate (CAGR) of almost 42.5%, resulting in an AUM of close to Rs 6.94 lakh crore.

It is important to note that mutual funds, which are not specifically designed for HNIs, have seen a YOY growth of only ~13.5 % in comparison with an AUM of nearly Rs 14.70 lakh crore in equity-oriented schemes. These numbers suggest a significant investment flow into PMS and AI products from the HNI category.

However, the interest in Private Equity is not altogether lost as PE investments offer exposure to non-publicly traded companies with high growth potential. And such types of investments require significant capital that is usually accessible only to institutional investors or high-net-worth individuals.

Furthermore, UHNIs and family offices in India are also still considering investing in private equity through selective deals or participation funds. Participation funds offer a flexible way for investors to participate in specific investment opportunities without committing to the entire fund.

Thus, while the interest in private equity may not be as widespread as before, it continues to remain a viable option for UHNIs and family offices looking to achieve higher returns through long-term investments in growing companies.

In conclusion, there is a marked shift in the way HNIs and UHNIs are investing today. Most are looking for diversified investment portfolios and exploring new asset classes driven by agendas such as sustainability and ESG.

There is also a clear generational shift is also noticeable between traditional HNIs and their heirs. The younger generation is more willing to embrace global opportunities and startups, while the traditional HNIs generally prefer a more moderate risk profile with a long-term perspective.

Overall, UHNIs remain committed to a well-evaluated asset allocation strategy based on their risk preferences, carefully evaluating any potential investment opportunity. They factor in the increased impact of global volatility and geopolitical risks on international markets, demonstrating the importance of risk management in wealth management.

Achieving sustainable long-term growth through a balanced portfolio that aligns with investment objectives remains the primary focus for UHNIs in India. The evolving investment landscape calls for a comprehensive investment plan that considers individual risk tolerance and financial goals, highlighting the need for expert guidance and professional wealth management services.

(The author is founder and CEO, Entrust Family Office)