Exotic investment options for HNIs

Last Updated: Mon, Dec 03, 2012 04:12 hrs

For three years, the going has been tough for stock market investors. While gold has provided some solace by giving over 20 per cent returns during the period, it is not wise to put all eggs in the same basket.

It is little wonder that investors, especially high net worth ones, are seeking alternative investments. An alternative asset class is something beyond the traditional ones (stocks and bonds) and includes structured products such as private equity (PE), investing in unlisted firms and start-ups, and real estate funds.

Alternative investments got a bad name in the 2008-09 crisis, when a number of exotic products such as derivative combinations were hit badly. Even art funds were hit badly. Experts recall that until the late 1990s, the Indian art market was not that big. By 2008, the market had grown 500 per cent. Art started to figure prominently in portfolios and valuations skyrocketed. Then came the economic crisis and wiped everything out. “Investors in art had presumed it would appreciate by up to 25 per cent yearly. And, art works could shield against the decline in stock markets. But none of that happened,” says a fund manager.

Growing affluence in India helped individuals easily afford ticket-sizes of between Rs 20 lakh and 25 lakh.

But things are changing. In May, stock market regulator Securities and Exchange Board of India (Sebi) notified the Alternative Investment Funds (AIF) Regulations, 2012. According to this, the minimum ticket size for investment should be Rs 1 crore.

Therefore, the first thing to understand is that alternative asset classes are not meant for a retail investor. Rajesh Saluja, CEO and managing partner at ASK Wealth Advisors, says, “At the moment, the most popular alternative assets are real estate and PE funds. They form around 80 per cent of the alternative asset class portfolios. Structured products are also common.”

Real estate funds: A number of builders raise money through this route. Some big ones take the direct route by talking to HNIs themselves. Other approach investment banks, wealth managers and private equity players to raise the money. Typically, the fund manager approaches an HNI and asks you to invest in such schemes. Returns can be as high as over 20 per cent. Investments are made in tranches, if it is for a upcoming project.

Realty funds’ portfolio takes two to three years to appreciate. Realty funds typically have investment tenures of five to eight years. Some funds are meant for last-stage funding. The tenure of such funds is shorter than that of the development-based funds. Rental-based funds have a shorter tenure.

The issue here is that these funds may not always disclose their valuations and returns they generate, making it difficult to take informed decisions. The returns from realty funds depend on the performance of the broader real estate market.

After the AIF guidelines increased the ticket size, angel investing route (many investors putting money together) is being taken to invest.

Private equity: For real estate and PE, fund managers will charge you around two per cent as management fees a year. And, then, a performance share, too. This means that once a certain hurdle is crossed (it is mostly 9-10 per cent returns), the investor will have to give the fund manager 20 per cent of the profits made. PE funds typically return 20-25 per cent annually, says Saluja of ASK Wealth Advisors.

PE investors put money in companies that are not publicly traded or invested as part of buyouts, hedge funds or new ventures. These companies add value to organisations with the objective of making these profitable. They deal in real estate, nano technology, renewable energy and biotech, among others.

It comes with its own set of risks. Therefore, you should not look at over 10 per cent of your portfolio. PE requires an investment horizon of five-seven years. You may not get your money back. Only if you have Rs 100 crore, can you afford to invest Rs 1 crore. PE experts consider those with less than Rs 1 crore investible money as retail investors. However, these funds could be a good portfolio diversifier.

Unlisted firms: This is yet another kind of PE investment, where you put money or buy stake in unlisted firms, largely start-ups. This is done in two ways –individually and in groups. Investors can pocket 15-20 per cent on an average and investment horizon is advised to be a minimum of five years.

Rohit Bhuta, CEO of Religare Macquarie Private Wealth, says, “Many clients are looking at investing in start-ups. They are looking at picking up 5-10 per cent through PE players. A lot of investors invest through the angel investing route. The companies invested into are those that are looking to raise $5-10 million.”

Structured products: A structured product, also known as a market-linked product, is a pre-packaged investment based on derivatives such as a single security, an index, debt issuances, or even foreign currencies. Most structured products in India come with ‘principal protection’ function as the key, which means that the investor gets back his principal.

For example, suppose you invest Rs 100 for 40 months in a Nifty-linked capital protection structure. Of this, Rs 80 is invested in debt securities, yielding a return of six-seven per cent per annum. Thus, over a period of 40 months, you could get Rs 20 as interest on these debt securities. This ensures that your capital of Rs 100 is protected. The interest of Rs 20 is invested in the Nifty. If the Nifty doubles in 40 months, Rs 20 will become Rs 40, thus the value of your Rs 100 will be Rs 140 at the end of the period, giving you an absolute return of 40 per cent.

On the other hand, if the Nifty were to fall by, say, 50 per cent, then the Rs 20 invested would become Rs 10, thereby giving you back Rs 110. This strategy ensures that at any given time, your capital is protected and you will get Rs 100 back at the end of 40 months.

There are many equity and equity-debt structured products on offer currently. Structured products are issued in the form of non convertible debentures (NCDs), whose returns are linked to an underlying stock index such as the Nifty or a basket of stocks. NCDs are better suited for retail investors. Sophisticated structured products, depending upon the market conditions, can be specially created for a set of clients and privately placed. The ticket size generally is Rs 10 lakh upwards.

Art film funds: “About five years ago, people did look at art or films funds as an alternative investment option. But it turned out to be too exotic for most. Not many are looking at these as investment options now,” says Bhuta of Religare Macquarie Private Wealth.

Experts say that since art prices do not depend on other components of a portfolio, art investment acts like a shock absorber when other asset classes are not doing well.

An art work, it is said, does not depreciate in value and hence is called a less risky investment.

But, not everyone can invest in it. Art prices largely depend on public tastes, making them a fairly speculative investment. Also, art cannot be resold quickly for a profit. Moreover, it needs high level of maintenance, storage, security, and it doesn’t give dividends, bonuses or income.

Similarly, there are funds investing in films. Or you invest individually or by way of crowd funding, like in the critically acclaimed “I Am”. But, this is still in its nascent stage.

Wine: Fine wine is a popular means of investment. Wine for investment is typically obtained from a reputable wine broker as wine houses do not generally sell directly to the public. Wine is not affected by the stock market, company bankruptcies or fraudulent activities. Wine investment provides exemption from capital gains tax, value added tax, and import and export duties. The quality of fine wine improves with time, hence its value increases.

However, the wine market is difficult to understand and analyse. Wine value is not always price-based, but on demand. Storing and preserving wines comes at a sizeable expense. As there are no Indian wines, wineries or wine funds one can invest in, one needs to look at international wine funds. More underlying assets might come into the Indian market such as co-investing in coal mines or dairy farms.

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