HNIs can use mutual funds to grow their wealth. Know how!

Being successful and wealthy at a very young age requires lots of hard work, determination and the most important one- Financial Planning.

If a person joins the workforce at the age of 22 and earns over 2 crore per annum, he/she is considered successful, but to build wealth and secure the future, the person has to plan well and invest their hard-earned money diligently.

People or households who own liquid assets valued between $1 million and $5 million (Approximately between 7 crore and 35 crore) are considered High-net-worth individuals (HNWIs), according to Forbes.

The HNWI population in India has increased to 2.63 lakh in 2019 compared to 2.56 lakh in 2018, says a study by Capgemini titled ‘World Wealth Report 2020’. India had only 1.52 lakh HNWIs in 2007. This shows a substantial growth in the number of crorepatis.

These HNWIs need to plan well from the beginning to grow their money, and mutual funds are one of the best options available for them.

Nitish Purohit, Partner at JNV Financial Services, says there are various financial products available for high-net-worth individuals based on their requirements.

“Financial products are divided into two categories- Market-linked products such as direct stocks, mutual funds, PMS (Portfolio Management Services) and AIF (Alternative Investment Fund), and fixed income category that includes products such as Fixed Deposits and PPF. For long-term wealth creation, mutual fund, as a category, has been evolving as one of the best options available for HNIs for close to a decade now,” says Purohit, adding that the best thing is that an investor has many product categories and portfolio mix available within the mutual fund space so that the investor can design the strategy and a portfolio mix based on his/her requirements and risk appetite.

Mutual funds are a very important tool for HNI investors for their long-term wealth creation because it offers liquidity, diversification in terms of various categories available, tax efficiency compared to other financial products available, liquidity, professional fund management and transparency, he adds.

Lumpsum investment plan

Nisha Sandeep, who is working in an IT company, and also a part of her family business says, “I was spending all the money that I had earned without understanding the meaning of investment. Once I started making a lumpsum investment in a mutual fund scheme, I started getting good returns and there was no looking back.” Nisha prefers a lumpsum investment in mutual funds.

Financial advisors say HNIs can make either a one-time investment like 1 lakh or 10 lakh or invest through a Systematic Investment Plan. If you are investing a lump sum there is always a risk while the market crashes, at the same time, the investors will benefit during a market high. Also, HNIs should set their goal and time frame to achieve the same. It is always better to consult financial advisors before investing any lump sum amount.

Property consultant Knight Frank India in its recent report says there are currently 5,21,653 Ultra-high-net-worth individuals (UHNIs with wealth of more than $30 million) globally, and there are 6,884 UHNIs in India. The report says in the next five years, there will be at least 11,198 UHNIs in India.

This data shows that financial advisors have a larger role to play and mutual funds will have a substantial role in wealth creation.

Investment advisor at FinIntellect Satheesh Kannan says physical assets such as real estate and gold are favorite assets among the HNIs. Equity provides the right opportunity to grow their wealth. If they are not market savvy, then mutual funds are the better option. They can have good exposure to this asset class.

Though HNIs have more opportunities in terms of investments, they should be cautious before making any decision.

Kannan says they should avoid timing the market and they can do well in equity investment by sticking to an asset allocation plan to suit their risk profile.

Many HNIs make investment mistakes because they are inexperienced to handle finances on their own. Nitish Purohit says HNIs should not make the following mistakes:

• Poor diversification: Diversification protects your investments against market volatility by balancing out risky holdings with stable assets.

• Portfolio Rebalancing: Portfolios should be reviewed periodically. Different asset classes will perform at varying times with some investment growing faster in value as compared to others. Since change is the only constant, personal circumstances change, economic scenario varies, and so should the portfolio of an investor.

• Liquidity and taxation: Investors should avoid choosing a product that is not tax efficient in nature. Also, they should avoid products that are more complicated in nature. These kinds of products do not offer liquidity. So, an investor has to be very careful while choosing the right product mix while building a long-term wealth creation strategy.

With the right investment strategy and also with the help of financial advisors, high-net-worth individuals can grow their wealth. Mutual funds are an excellent choice for them as it will create more financial stability.

Key takeaways

1) HNIs should start investing early and can allocate money across asset classes.

2) Investors should set a goal and stay focused till they achieve the goal- building wealth.

3) Realty funds offer good returns for HNIs. They should also focus on portfolio re-balancing.

This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.


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