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One of the more prominent categories of investors in the Indian stock market is high-net-worth individuals (HNIs). In fact, they are such a crucial part of the Indian financial markets that all Initial Public Offerings (IPOs) of companies dedicate a portion of the IPO to HNIs. Wish to learn more about high-net-worth individuals and the various benefits, risks, and challenges they face in the market? Continue reading to find out.
Key Takeaways
- High Net-Worth Individuals are people with significant personal wealth. They are categorised based on investment size.
- They usually spread their money across shares, mutual funds, property, private equity and bonds. They may also consult financial planners or tax experts.
- Their larger portfolios give them access to tailored services. This includes premium banking and specialised investment tools.
- They face challenges like market swings, liquidity concerns, rising interest rates, and unclear regulations.
What Is a High-Net-Worth Individual (HNWI)?
A high net worth individual, or HNI, is a category of investor in the Indian stock market. Although there are no official criteria that an investor must meet to be classified as an HNI, individuals with a net worth exceeding ₹5 crore are widely considered to be in this category.
As far as Initial Public Offerings (IPOs) are concerned, the Securities and Exchange Board of India (SEBI) categorises individual investors who invest more than ₹2 lakhs in a public issue as Non-Institutional Investors (NIIs), which includes HNIs.
Also Read, What Is IPO (Initial Public Offering)?
Understanding High Net Worth Individuals (HNWIs)
High-net-worth individuals are people whose personal wealth exceeds a certain financial threshold. Although the exact figure varies across institutions and countries, the most widely accepted benchmark is around $1 million in liquid assets. This amount does not include a person’s primary home or items like artwork or collectibles, as these can take time to sell.
Banks and financial institutions typically offer high-net-worth individuals special benefits, including lower fees, priority banking, dedicated relationship managers, and access to private investment opportunities. These perks recognise the value and complexity of managing larger sums of money.
As wealth grows, so does the responsibility of preserving it. HNIs often require personalised financial planning, including investment management, estate planning, and tax strategies tailored to their needs. They may also qualify for separately managed accounts instead of standard mutual funds, giving them more control and a more customised approach to investing.
What are the Different Categories of High Net-Worth Individuals?
High-net-worth individuals are commonly categorised into three types based on their total net worth. Here’s a quick look at the three different types.
- High net worth individuals (HNIs) - Individual investors with a net worth of up to ₹5 crores
- Very high net worth individuals (VHNIs) - Individual investors with a net worth between ₹5 crores and ₹25 crores
- Ultra-high net worth individuals (UHNIs) - Individual investors with a net worth of more than ₹25 crores
For the purpose of Initial Public Offerings, the Securities and Exchange Board of India (SEBI) categorises NIIs (HNIs) into two types. Let’s look at what these two types are.
- Small NII - High net worth individuals who invest anywhere from ₹2 lakhs to ₹10 lakhs are termed small NII or sNII.
- Big NII - High net worth individuals who invest more than ₹10 lakhs are termed big NII or bNII.
How High Net-Worth Individuals Manage Their Wealth?
High-net-worth individuals manage their wealth using a diverse mix of strategies across facets such as investment management, tax planning, and estate planning. Let’s look at each of the facets in more detail to get a better idea of how HNIs manage their wealth.
Investment management involves determining financial goals, ascertaining the risk profile, and developing detailed investment plans that are in line with those goals and risk profile. It also involves investing in a plethora of different investment options, ranging from equity and debt to mutual funds and alternative investment funds. Most HNIs generally employ an experienced and dedicated investment manager or a financial advisor to manage their investments effectively.
Tax planning involves working with experienced tax professionals to reduce tax liability through structured investments and by making use of the available tax deductions. Estate planning, meanwhile, involves working with attorneys to ensure a tax-efficient transfer of wealth to future generations in the manner they wish.
What Benefits Do High Net-Worth Individuals Get?
In the context of the Indian stock market, high-net-worth individuals don’t get any additional benefits over other investors. However, with respect to public issues, companies often demarcate a portion of their total issue size for Non-Institutional Investors, which includes HNIs. Out of the portion reserved for NIIs, 1/3rd is dedicated to sNIIs, whereas the remaining 2/3rd is dedicated to bNIIs.
Other benefits that high net worth individuals enjoy include access to exclusive and personalised financial services like Portfolio Management Services (PMS), specialised financial products like algo trading tools and dedicated banking services, among others.
Also Read, How the Stock Market Works?
What are Some Investment Options For High Net-Worth Individuals?
High-net-worth individuals generally invest in a diversified portfolio of investments to reduce market risk and protect their capital from adverse market movements. Here’s a quick overview of some of the most common investments that HNIs typically make.
- Equity Markets: India’s equity markets have consistently outperformed many global peers, thanks to strong economic fundamentals and foreign investor interest post-liberalisation.
- Stocks: Experienced investors with strong research capabilities often choose to invest directly in stocks. They focus on building diversified portfolios while hunting for multi-bagger opportunities. Beginners may start with companies that have solid track records and long-term growth potential.
- Mutual funds: To ensure long-term wealth creation, high-net-worth individuals may also dedicate a portion of their investment capital to mutual funds. Again, depending on their risk profile and financial goals, they may invest either in equity funds, debt fundsor hybrid funds.
- Hedged equity products: To manage market volatility, hedged equity products can offer a balanced approach. These strategies aim to minimise downside risk while still offering exposure to equity growth, especially useful in uncertain global conditions.
- Real Estate: High-net-worth individuals also routinely invest in real estate by either purchasing properties or by investing in Real Estate Investment Trusts (REITs).
- Private Equity: Risk-aggressive HNIs may also invest in unlisted companies by purchasing a portion of their equity. HNIs who invest in private equity often stay invested until the company eventually issues anIPO, at which point they exit by selling their stake via the public issue.
- Private Debt: Just like private equity, HNIs may also issue loans to unlisted companies. Such loans are referred to as private debt and are a good way to get regular income by way of interest payments. However, unlike bonds, private debt is far more risky and is more suitable for individuals with high-risk appetites.
- Government Bonds: HNIs routinely invest in both corporate bonds and government bonds. Investing in bonds and debentures provides some much-needed diversification to their portfolio and creates a regular income source.
- Initial Public Offerings (IPOs): IPOs provide a lucrative opportunity for HNIs to invest in promising companies at the early stages of their public journey. By participating in IPOs, HNIs can benefit from potential listing gains and long-term capital appreciation. Many also use IPOs as an exit strategy when invested through private equity routes.
Risks and Challenges Faced By High Net-Worth Individuals
Although HNIs enjoy many benefits and have access to many different investment options, they routinely face many risks and challenges. Here’s a glimpse of some of the most common risks and challenges they have to face
- Market Risk: Many market-linked investment options that HNIs invest in are highly sensitive to price movements and volatility. This increases the risk of losses due to adverse market movements.
- Regulatory Risk: Not all of the investments that HNIs prefer are well-regulated. In the case of unregulated investments, they face major risks ranging from fraud to strong regulatory intervention.
- Interest Rate Risk: High-net-worth individuals who invest in bonds and other fixed-income securities often face interest rate risk. For instance, if the interest rates in the economy are raised, their investments will underperform.
- Liquidity Risk: Alternative investments like private equity, private debt, and real estate are generally very illiquid. This makes it extremely challenging to cash out their investments.
Conclusion
With this, you must now have a detailed understanding of what high-net-worth individuals are, the benefits they enjoy, and how they manage their investments. Although it may not be apparent, HNIs are a major part of the Indian financial markets, whose influence continues to grow slowly and steadily through the years.
