The Rs 400-crore Citibank fraud has brought the wealth management business in the spotlight. While 40 high networth individuals (HNIs) and corporates have reportedly complained of having lost money, questions are being raised about the kind of products they chose to invest in.
Typically, the basic investment portfolio includes equity and debt. But there are other options as well. Here’s a look at some:
Private equity
To get into the unlisted equity space, HNIs are offered private equity (PE) funds. Companies backed by broking houses arrange for financing IPOs. Private bankers are instrumental in merger & acquisition investments. HNIs could also raise capital or make direct investments in unlisted companies, outside of a fund.
Risks: PE funds, even institutionalised funds, with long lock-in periods, block investments. Managers believe investing in companies that belong to friends and family is risky. “As an intermediary, we prefer clients investing in companies about which ample data is available,” says Richa Karpe, director-investment, Altamount Capital Management. The maximum investment should not go beyond 5-10 per cent.
Structured products
Banks offer in-house structured investment options after assessing investible products. These give a downside protection to the capital since they put almost 80 per cent of the fund in debt, and the remaining in derivatives. The returns could be 8-8.5 per cent.
Risks: Typically, many HNIs opt for such products, thinking these offer capital guarantee. The investment made by such products is questionable, as these are not regulated yet. Rajesh Saluja, CEO and managing partner, Ask Wealth Management, feels the 80 per cent invested in debt could be risky. “Unless the money is going in government or bank bonds, one cannot be sure. What if it is invested in a non-banking finance company that gives loans to individuals who cannot service the debt?” asks Saluja.
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Commodities
Most HNIs are offered commodity trading options as part of portfolio diversification. Some may even opt for the overseas commodities market for commodities not traded in the local market. For instance, HNIs may look beyond India if they are interested in silver and platinum exchange-traded funds (ETFs). Only gold ETFs are traded in India.
Risks: Commodities are cyclical in nature, so timing is primary. Also, there is scope for speculation.Unlike equity, there may not be enough data to rely on.
Property
Property forms a large part of any HNI’s portfolio. One could invest either through property funds or in physical property. Investing in property funds negates the need to verify title deeds. HNIs are also offered property deals in prime centres such as New York, London and Dubai, which have corrected lately.
Risks: Real estate funds have a long gestation period. Investors cannot opt out midway unless they forfeit the investment till then. Investing overseas is also open to currency risks. Managers suggest only those with 10 years or more exposure in the Indian market should opt for expanding portfolios overseas.
Exotic products
Investing in art, coins, wine, etc is being touted as the latest investment option. Many HNIs may want to possess these because of their own taste. A wealth manger may help HNIs value and insure these.
Risks: Exotic investments may not be liquid. Without a market to buy and sell, these end up being dud investments.
