Friday, August 20, 2010

How India's Rich Invest Their Money

Indians are getting richer, but where do the rich invest their money? Believe it or not, a bulk of it is in stocks, bonds, and mutual funds – the types of investments that individuals like you and I can also buy.
India has around 130,000 people with investable assets of more than $1 million, according to a recent report by Capgemini and Merrill LynchWealth Management. To manage a slice of this money, dozens of companies have launched or are planning to launch what are called "wealth management" or "private banking" businesses in India.
These services charge the rich a fee of up to 1.5% of assets under management, plus the firms take commissions or other fees for creating special investment products. For a $1 million portfolio, that's a cool $15,000 or more in fees.
So, what do the wealthy get for this high fee? Here are some of the answers:

Structured Products/Notes
These are basically contracts in which a bank promises to provide a certain return to the investor for a fee. One popular type of contract is the "principal-protected" note, in which investors always get their money back.
The note, for examples, might be tied to the Bombay Stock Exchange's Sensex. The bank promises that if the Sensex loses value, the investor gets his principal back. The catch is that if the Sensex gains value, the investor gets only a portion of the gain, say 80%.
Essentially, the investor gives up some of his potential return for the peace of mind that his principal investment is safe. These structured notes can be linked to the performance of an index or to a basket of stocks, or other assets.
These are a relatively new type of investment, and not many people own them yet. But the interest is growing. "These are getting increasingly customized" to meet specific investors' needs, says Satya Narayan Bansal, chief executive officer, Barclays Wealth, India.
Investors need typically around 2.5 million or 5 million rupees ($100,000) to get one of these contracts.
Real Estate
The super-rich share the general public's fascination with real estate as an investment. It makes up as much as a fourth of their portfolios in India, estimates Pradeep Dokania, chairman of India global wealth and investment management at DSP Merill Lynch Ltd.
"Real estate has become a much bigger asset class in India," he says.
Of course, the rich invest in real estate differently than everyone else.
Some buy offices or other commercial spaces to make money on rentals.
It can be a headache to manage property, so some investors buy real estate funds instead. These funds invest in many of real estate projects on behalf of clients. A minimum 5 million rupees ($100,000) investment is needed to buy these.
Many such funds were launched in 2007, at the peak of the real estate market, but their returns have not been so good. These funds had partly invested in offices and malls whose values have remained quite low after the economic downturn of 2008.
Some investors are even more aggressive. In Delhi, some of the super-rich buy a block of apartments in yet-to-be constructed buildings, hoping to sell them at a higher price to other buyers or home-owners. It will take more than excess of 1 crore rupees ($200,000) to do this.

Private Equity/Direct Investments
Wealthy individuals and families sometimes also invest directly in businesses in sectors like education, health care, clean technology or micro-finance.
These investments carry high risks because if the businesses sink, the investor could lose all their money. Also, it can take years for a business to succeed, so investors' money is locked in for a long time.
To compensate for this risk, investors expect an annualized return of 30% or more, says Richa Karpe, director of investments at Altamount Capital Management in Mumbai.
When it's tough to identify individual businesses to buy, wealthy investors invest through a private equity fund which invests directly in a few businesses. Ms. Karpe recommends limiting direct investments to 15% of clients' overall wealth.
Asset-Backed Debt
With interest rates so low recently, the super-rich have been looking for ways to increase returns on their debt investments.
One way they've been doing that is by buying bonds which have a dedicated asset as collateral. A company might, for example, issue a bond of 25 crore rupees ($5.3 million), and set aside some real estate it owns worth 50 crore rupees ($10.6 million) as a collateral. Investors who buy this bond would get a pre-determined interest rate and in case the issuing company fails to pay that interest, the investors can sell the underlying asset and recover their money.
Ms. Karpe says interest on these bonds, of one to two-years term, ranges from 11% to 16%. That's a much better deal than the 7% or so interest on two-year bank fixed deposits.
To participate, investors typically need to bring a minimum investment of 1 crore rupees. Ms. Karpe advises a limit of 5% of client assets in these, spread among bonds of different issuers.
Getting Niche
Sometimes wealthy individuals make what advisers call "passion investments" in things like art or antiques. Very few wealth managers in India have the expertise to advise on these, so the super rich are on their own.
At Morgan Stanley Private Wealth Management, some clients have been keen on investing in water or alternate/renewable energy, said Amitava Neogi, executive director, in an email interview. For this, they typically buy foreign funds which invest in stocks of companies which operate in these sectors. Indians are permitted to invest up to $200,000 per financial year in overseas investments.

Bread, Butter and Glitter
All the investments mentioned above use up less than half of the wealth of the wealthy. The rest is invested in good old stocks and bonds, often through mutual funds.
Many also put up to 5% of their investments in gold, through exchange-traded funds. These funds can be bought on the stock exchange for small amounts of money, so there is no advantage to the rich here.
Think about this: the super-rich pay wealth managers a fee to buy them a mutual fund or exchange-traded fund, which in turn, charges another fee. Those of us without millions to splurge can skip that extra layer of fees, by buying diversified stock and bond mutual funds on our own.

Source : WSJ

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