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.
What is HNI?
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 a 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.
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.
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.
- Stocks
Most HNIs tend to invest in stocks of listed companies. Depending on their financial goals and risk profile, they may invest in large-cap, mid-cap, small-cap or a mix of all three types of stocks.
- 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.
- 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 funds or hybrid funds.
- 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 an IPO, 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.
- 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).
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.
FAQs
Do all IPOs dedicate a portion of their issue size to HNIs?
Yes. All mainboard and SME IPOs dedicate a portion of their issue size to Non-Institutional Investors (NII), of which high net-worth individuals are a part.
Who are categorised as high net worth individuals?
There are no formal criteria for categorising an investor as a high net-worth individual in the Indian stock market. In the case of an Initial Public Offering, however, all individual investors who invest more than ₹2 lakhs are considered to be HNIs.
How do HNIs manage their risk in stock market investments?
High net-worth individuals manage investment risk through portfolio diversification. By investing in a wide range of asset classes, they protect their investments from adverse market movements. Some HNIs also hedge their equity positions using stock options to mitigate market risk.
Are there any specific regulations or requirements for HNIs when investing in the Indian stock market?
No. There are no specific rules, restrictions or requirements for HNIs when investing in the Indian markets. They’re treated on par with retail investors.
What are some investment products that HNIs in India typically invest in?
HNIs in India primarily invest in stocks, mutual funds, bonds and treasury bills. Some high net-worth individuals also invest in alternative investment vehicles such as Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).