Wealth is one of the measures of financial success. High-net-worth individuals (HNIs) are wealthy individuals occupying financially privileged positions in society. In India, HNIs are those with investable assets of over Rs. 5 crore.
HNIs need to invest and must have a long-term vision. Most HNIs are owners of big companies who are in positions of CEO, chairpersons, CTO, etc. Such wealthy individuals must be cautious and incorporate proper financial planning to keep up with their expensive lifestyle and ensure to preserve their capital.
That is why many private banks, financial advisors and firms play an important role in providing specialised services to help HNIs achieve their desired financial objectives.
Types of HNIs in India
High net worth individuals (HNIs) are classified into three categories based on their total net worth. The three types of high-net-worth individuals are:
- High Net Worth Individuals (HNWIs): Individual investors holding liquid assets of up to Rs. 5 crore fall under this category.
- Very High Net Worth Individuals (VHNWIs): Individual investors with a net worth between Rs. 5 crore and Rs. 25 crore are considered very high-net-worth individuals.
- Ultra High Net Worth Individuals (UHNWIs): Individual investors with a net worth above Rs. 25 crore are considered ultra-high-net-worth individuals.
For Initial Public Offerings (IPOs), the Securities and Exchange Board of India (SEBI) has further categorised NIIs (HNIs) into two different categories based on the amount they are willing to invest. The two different types of NIIs are:
- Small NII: High net worth individual investors investing anywhere between Rs. 2 lakh to Rs. 10 lakh are categorised under this category.
- Big NII: individual investors investing more than Rs. 10 lakh are considered big NIIs.
Who Are High Net Worth Individuals (HNIs)?
A high net-worth individual (HNI) falls under the category of investors in the Indian stock market. Individual investors exceeding its net worth value of Rs. 5 crore are categorised under high-net-worth individuals in India. These individuals are mostly business owners, corporate executives, entrepreneurs and more.
In the IPO application category, SEBI defines anyone investing an amount over Rs. 2 lakh as an HNI. Furthermore, there is a subcategory of investors bidding between Rs. 2 lakh and Rs. 10 lakh with one-third reservation of the HNI portion. The large HNIs are those investing above Rs. 10 lakh, and they have two-thirds reservation of the HNI portion.
In most cases, private wealth managers prefer working with high-net-worth individuals because of the complexity of managing wealth. HNIs demand personalised services in estate planning, planning of taxes and other financial areas. It is important to note though that the exact threshold for HNWIs varies across countries and financial institutions.
Countries with the Most High-Net-Worth Individuals
As per several studies and reports, the countries with the most high net-worth individuals are the United States, Japan, China and Germany.
The USA comprises the highest number of HNWIs in the world, with approximately 18 million individuals. China ranks second with approximately 4.4 million high-net-worth individuals. On the other hand, Japan constitutes around 3 million NHWIs and Germany around 1.5 million approximately.
In India, there were 7,97,714 HNI individuals with assets of over USD 1 million in 2022. The number is expected to grow considerably in the next few years.
The number of net-worth individuals varies depending on factors such as income inequality, economic growth, opportunities for investment and financial conditions. However, the distribution of HNWIs is likely to change in the upcoming years with the change in these factors over time.
What Are the Investment Options for HNIs in India?
- Alternative Investment: Alternative investments have become a popular option among HNIs in India. There exist numerous reasons behind this. By opting for alternative investments like private equity, fractional real estate and P2P lending, HNIs can diversify their portfolio with assets which have a low correlation to typical options like stocks and bonds. Individual investors also can earn high returns from these investments.
Both skilled and professional fund managers possessing a clear understanding of the financial needs of NHIs manage these funds. If you are new and looking for the right AIF option, you should consult a financial planner first. - Portfolio Management Scheme: This is an ideal investment option to consider for HNIs. The minimum investment required here is Rs. 50 lakh. PMS schemes provide a great deal of flexibility to HNI investors. They can personalise the scheme according to their requirements. For instance, individuals can opt for concentrated bets and choose a fund manager to assist them in investing in a particular sector or region.
At the same time, investors must also remain aware of the higher risks associated with these funds and decide to invest accordingly. - Market Linked Debentures (MLDs): Market Linked Debentures generally follow benchmark indices such as the gold index, equity index, G Sec yields, etc. Investors gain exposure to various market segments and avoid the risks of direct exposure to any asset. HNIs can choose this investment option especially when the market is volatile or when investors expect the market to be volatile shortly.
- Real Estate Funds/Commercial Real Estate: Many HNIs invest in the real estate sector for portfolio diversification. Other than directly purchasing real estate, HNIs can invest in REIT (Real Investment Investment Trusts) to invest in multiple projects. They can also invest in commercial real estate through various alternative funds. Commercial real estate is capable of delivering higher returns than residential real estate.
Commercial real estate considers not only office spaces but also warehouses and shopping centres. Interested HNIs can also invest in serviced apartments or co-living spaces. - Angel Investing/Unlisted Equity: HNIs can also consider investing in start-up companies, commonly referred to as Angel investing. It would be even better if HNIs could diversify their angel investments across 8-10 companies to successfully manage high risks. HNIs can also provide support to some entrepreneurs with inputs and contact.
What Are the Key Challenges Faced by HNIs?
- Market Risk: HNIs investment in some market-linked investment options stays highly sensitive to price movements and volatility. Investors face a high risk of losses because of investment in risky options like hedge funds, and structured products that are more influenced by market fluctuations.
- Liquidity Risk: When there is a need for HNIs to access their funds quickly, illiquid alternative investments such as private equity and real estate pose certain challenges
- Regulatory Risk: High-net-worth individuals tend to invest in unregulated products. This thereby exposes them to mismanagement, fraud and sometimes unethical practices.
- Concentration Risk: High net-worth individuals with a significant portion of wealth concentrate on investment in a single asset. For this, they face some potential risks from the occurrence of unexpected events.
- Operational Risk: HNIs are prone to operational risks including theft or fraud. This thereby leads to significant financial losses for individual investors.
- Complexity: Any complexity with investment options made available to HNIs turns out difficult when it comes to measuring risks and potential returns accurately
- Taxation: HNIs need to face certain complex taxation challenges relating to investment. This includes estate taxes, capital gains and also gift taxes. To overcome all these challenges and risks, HNIs need to consult investment managers and financial advisors to get a guide for proper diversification of their portfolios.
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