In the world of the rich, money is a subject fit for discussion any time anywhere.

Rajesh Mohan, a wealth manager at a private wealth firm, remembers a meeting with a client at the Delhi Airport early one winter morning last year. The client was to catch a flight to Bangalore but his mind was in the UK, where he wanted to buy a piece of real estate.

Homes in many prime locations in London and elsewhere in Britain were going cheap — as they still are — in the global downturn and financial mess that tailed the mortgage crisis in the US. By September, newspapers were full of stories of Indian and Chinese high net worth individuals (HNIs) snapping up luxury homes in posh districts of London and New York.

The private wealth firm Mohan represents does not do overseas real estate deals. But it keeps getting requests, which are routed to an overseas business partner.

Mohan is just one of hundreds of wealth managers who cater to rich Indians, advising them on where to park their considerable wealth, and helping them make more money. Real estate is but one — albeit popular — avenue of deploying their money.

Rich Indians have for some years been buying property abroad. “The trend has grown stronger since the global financial crisis, thanks to which property prices in most western markets have flattened out,” says Ashish Khetan, head of family office at Kotak Wealth Management, arguably one of the oldest and largest players in this space. The pull factor has only gathered momentum on the back of a weakening rupee, which has led Indian HNIs to look at options of parking wealth.

“A lot of real estate investment went overseas in the past two or three years, primarily in homes in Ivy League college towns in the US such New York, Chicago, Boston, and the UK. Typically, many of these investments were in the range of $200,000-$1,000,000,” according to Sunil Mishra, CEO of Karvy Private Wealth. In wealth management terminology, an HNI is one with investible wealth of $1 million or more. Then there are ultra-HNIs — those with investible assets of $30 million or more.

“As many HNIs have expanded their businesses beyond the Indian shores, they are evaluating options of purchasing real estate either for investment purposes or for leisure. So clients have explored second and third homes in global financial centres such as Dubai, Singapore, London and New York,” says Prateek Pant, head of products and services at RBS Private Banking in India.

A typical Indian HNI portfolio will be weighted heavily towards real estate. This comes mainly from inheritance; and investments in second homes and holiday homes in exotic places and hill stations. Mishra reckons that even if the primary home is excluded, an HNI’s portfolio will have up to 40 per cent of assets in real estate. While HNIs are known to have invested in mansions and malls extensively, what is not common knowledge is that many are also active early-stage investors in middle-class homes, “buying maybe a couple of 3/4BR flats in a project,” says Mishra.

In India, HNIs have exposure to both residential and commercial real estate, the latter including malls, office space and even warehouses. These investments are mainly in the metros, but there is also a trend towards taking measured risks in assets like holiday homes, agricultural land and plantations.

Real estate investment trusts, better recognised as REITs, are realty-oriented venture funds that came into being in the Indian market around 2005. They too are popular with Indian HNIs. Returns from these funds are still a matter of conjecture, as the first funds will mature only in another year or two. But these products did and see strong participation and continue to do so.

The tribe of Indian HNIs is not large yet, but growing fast nevertheless. A wealth report for the Asia Pacific region by Merrill Lynch Global Wealth Management and Capgemini in October pegged India’s HNI population at 153,000 in 2010, up 20.8 per cent from 126,700 a year before. Of them around 62,000 are ultra-HNIs.

According to a report by Kotak Private Wealth and Crisil, the number of the ultra-HNIs is projected to grow to 219,000 by 2015-16. In 2010-11 India was home to 57 billionaires, according to Forbes. The country is next only to the US and China in the number of billionaires. Swiss private banking group Julius Baer projects India’s HNI population to more than double to 403,000 by 2015. Karvy Private Wealth estimates Indian HNI wealth to nearly triple from Rs 86,50,000 crore now to Rs 2,49,00,000 crore by 2015-16, growing at a compounded annual growth rate of 23 per cent.

The rich are not only getting richer and more numerous, they are also getting younger. The average age of Indian HNIs has fallen to the mid-40s from the early 50s in just five years. This has happened because second generation entrepreneurs have come in hordes to replace the older generation. Also, plenty of professionals have turned entrepreneurs and the pay of many more still holding jobs qualify them to be HNIs.

The phenomenal growth in the numbers has not only spawned the wealth management industry but also led to its exponential growth. Homegrown as well as global players are actively chasing plentiful opportunities to manage this gigantic HNI wealth. At last count, India had about a dozen institutional players in private wealth management, besides a number of boutique firms — with strong connections with the caviar crowd — that are also doing brisk business.

“A dozen players, with at least 50 wealth managers each. We are quite a crowd now,” quipped a wealth manager at a domestic private wealth management firm. You would spot them meeting prospective clients on the fairway of the golf course on a Sunday morning or networking at a party in the evening, or even at a private gathering like a family do. “You cannot simply walk in to solicit business. Hundred per cent of it happens through references, which means you have no weekends, no fixed working hours and possibly no holidays also,” remarks the wealth manager.

Many of these firms also run family offices, where sophisticated, highly-skilled and foreign-educated wealth managers play the traditional ‘munim’ to the uber rich, doing their wealth planning from dedicated desks. These units typically manage portfolios above Rs 100 crore.

Growing entrepreneurship has been the dominant source of wealth creation in India, while fast-growing service industries such as IT and financial services have catapulted many middle-income individuals into the HNI bracket.

The average rise in HNI wealth has been in the high double digits, not much is known about their savings habits. The wealth of salaried HNIs rise has come mainly from Esops and other innovative salary structures, strong performance of Indian companies, a buoyant capital market and hefty return on personal investments.

Private wealth planners project the average Indian HNI as a largely conservative and slightly daring investor, who would still like to see most of his/her investment physically in front of his eyes. A typical HNI portfolio, they say, is 20 per cent equity, 30 per cent debt, 40 per cent real estate and 10 per cent gold and other assets. The dichotomy is they are pretty much diversified but not quite adept at judicious asset allocation.

The dictionary of wealth management describes asset allocation as an investment strategy that attempts to balance risks with rewards by adjusting the percentage of each asset in a portfolio according to the risk tolerance, goals and investment time frame of an investor.

“Asset allocation preferences of an individual are typically a function of three factors: risk tolerance, time period and return expectation. However, for many HNIs, their past experiences with asset classes drive investment preference. Real estate has been a popular investment choice, given its emotional appeal and super-normal gains in the past few years,” points out Pant of RBS Private Banking in India.

While HNIs do carry an unquenchable thirst to grow personal wealth as strongly as their core ventures, investment patterns show they exercise far greater caution when it comes to personal investment compared with the kind of risks they would take in their businesses.

Indian HNIs can be broadly classified into three categories — inheritors (those born with a silver spoon in the mouth, having inherited high net worth); the self-made rich or first generation entrepreneurs whose success in business has made them wealthy; and professionals, or qualified, highly-skilled people who have amassed wealth because companies that employed them grew bigger. Each of these groups has unique wealth dynamics.

For the last category of HNIs, Esops are the main instruments of wealth creation. “You would find the equity portion of their portfolios a little skewed. About 25 per cent will be invested in one company that he or she is attached to,” says Mishra.

On the equity side, an average HNI will generally have exposure to three kinds of investments: public equity (investments in listed companies); private equity and venture capital, or early stage, start-up investments.

“Within the listed space they will mostly have exposure to large-cap and mid-cap stocks. And a very few aggressive investors will have a limited exposure to small-cap firms also,” according to Mishra. There is also a lot of HNI participation in private equity funds.

“We do advise clients who set aside 5 to 10 per cent of their equity portfolio to private equity. These are high-risk-high-yield instruments and have typically a six- to eight-year investment horizon.” But as an equity investor, they can act much the same way as anyone on Dalal Street will. “They would typically stay with the ‘slogan of the season’, and often get carried away by market swings. At the turn of a cycle, they will go away, and try to be around,” said Khetan.

In the recent downturn, most Indian HNIs were known to have hugely depended on equity earlier, shifted into fixed income assets. This trend was quite pronounced in the past two years.

Wealth planners claim many HNIs left the stock market unscathed by the downturn, unlike retail and institutional investors who lost heavily. Sensex lost 26 per cent in 2011, eroding some Rs 19,50,000 crore of investor wealth.

“While the HNIs’ approach to investment is largely conservative, wealth planners often play devil’s advocate and manage to convince them to go for balanced portfolios of, say, half in equity and half in debt, even when the stock market is doing very well. That keeps the exposure to equity fairly cushioned. This is what stood most HNIs in good stead in the downturn. High interest rates also ensured them good returns,” Khetan said.

Risk aversion may be their hallmark, but of late some HNIs have shown greater sophistication in broadening their investments. Many have been drawn to less traditional asset classes, such as hedge funds, private equity and derivatives.

Many Indian HNIs also participate in the global success of individual companies, such as Apple or Exxon. They buy equity in these companies through international broking houses.

In the international market another preferred instrument is managed commodity futures, which play on a variety of commodities such as crude oil and base metals. In India, investors have no access to similar products.

But many HNIs do take exposure to some complex arbitrages, which largely means trading in equity derivatives. “We generally recommend simple products. But then, at the end of the day the client has a choice. Most wealth managers follow an open architecture model, that is, identifying products from across a spectrum and not concentrating on in-house products alone. It may also mean referring a client to a product run by a boutique firm, if it is best at it,” Khetan reveals.

Commodities may have emerged as a wealth multiplier globally, but the average HNI generally avoids it. That’s particularly true of the Indian HNI. “Gold and to a certain extent silver remain the main commodities where HNIs take exposure. In the bullion trade they go in for both physical commodity as well as ETFs. Structured products like gold debentures too are extremely popular with this class of investors,” says Mishra.

HNIs like gold as it offers capital protection. They also look at it as a saving for the rainy day. Most would rather keep gold in the locker.

Another trait is that HNIs have a strong penchant for debt instruments. The fact that most of them are exposed to huge risks either from a business cycle, stock market exposure, stakes in their own business, or career uncertainties creates a tendency to seek preservation of capital.

So when tax-free bonds from NHAI and IRFC came in you saw huge HNI interest in them. “At 8.2 per cent tax-free returns, these were no-brainers. An HNI would typically keep looking for such instruments,” Khetan points out. Within the debt basket will mostly be government bonds, fixed-maturity sche-mes of mutual funds, debt funds and bank fixed deposits. Contrary to the popular perception, the bulk of HNIs are not art investors; nor do they put money in exotic investment products such as vintage cars or wine. “Many buy expensive art as passion buys and not really as an investment,” says Khetan. They spend a lot of money buying art and artefacts, yachts and islands, or even racing horses. But they do not count them as wealth creation propositions.

According to the Capgemini Merrill Lynch World Wealth report 2011, there has been greater appetite among HNIs for passion investments as the global economy rebounded.

“Our experience is that their propensity to acquiring passion investments have considerations that are not necessary traditional. However, many a time they are solid financial investments and will continue to play a role in their portfolios going forward,” Pant said.

bijoysankar@mydigitalfc.com