Photo: AFP
Photo: AFP

Stock markets are a great leveller

HNIs may be just as good or bad at making money in the stock markets as any other retail investor

Stock markets can make or break millionaires. As indices move up and down, millions are made and millions are lost for well-heeled individuals who choose to invest in equities as a way to grow their wealth.

The new rich in India, however, have not been overly dependent on equities to grow their wealth but equities do account for a substantial part of their portfolios. In 2013, 38% of their investment portfolio was parked in equities, according to Kotak Wealth Management’s Top of the Pyramid report. This allocation has remained roughly steady over the years for which data is available and has only grown by four percentage points from 34% in 2010 to 38% in 2013.

Over this same period, S&P BSE Sensex and CNX Nifty have returned more than 50% in nominal terms. But what the markets gave, inflation took away. If you adjust these returns for consumer-price inflation for industrial workers, the returns dwindle down to a mere 8% over the three-year period.

That’s not to say that such investors could not have made a killing based on their stock market investments, depending on what exactly they invested in. Within the group of 50 stocks included in the Nifty, at least 10 stocks have seen gains in excess of 100% over the three-year period. The best performer has been Sun Pharmaceuticals Ltd, which has given more than 400% returns. Shares of HCL Technologies Ltd, Lupin Ltd and IndusInd Bank Ltd have jumped more than 300% each.

A separate study, by Motilal Oswal Securities Ltd, which measures wealth creation over a longer period between 2008 and 2013 based on market capitalization, while taking into account any equity dilution, finds that Tata Consultancy Services Ltd (TCS) has been the biggest wealth creator over this time. TCS, though, may have been a relatively safe bet. Wealthy individuals, with a higher propensity for risk, could have made a much bigger killing in stocks like TTK Prestige Ltd, which was the fastest wealth creator. The stock has multiplied nearly 28 times, translating into annualized returns of 95%, says the study. For the low risk takers, Asian Paints Ltd may have been the best option. The study dubs it the most consistent wealth creator, with the highest compounded annual growth rate of 36% over a 10-year period between 2004 and 2013.

Which brings us to the question: How do the rich pick and choose their stock investments? The answer to that appears to depend on the source of wealth for the individual—those who have inherited their wealth appear to have different investing styles from those who have earned it. Wealthy professionals are more risk averse and disciplined about their investing style compared with entrepreneurs, who tend to be more speculative, found the Kotak Wealth study. Professionals also tend to rely more on their own judgement while deciding on where to invest, while entrepreneurs and those who have inherited their wealth consult with family and friends before investing.

What this probably tells you is that the rich may be just as good or bad at making money in the stock markets as any other retail investor. Conventional wisdom suggests that retail investors are the last to enter a market rally and often end up losing money because of poor market timing. But there is no empirical evidence to prove that the wealthy are smarter investors. The scale at which they invest differs, and hence, so do absolute returns.

The other benefit now available to big ticket investors is the specialized funds that are being launched to target their money. In 2012, the Securities and Exchange Board of India (Sebi) notified a new category of pool-in investment vehicles known as alternative investment funds (AIFs), which includes hedge funds, real estate funds and private equity funds, among others. While some of these, such as private equity funds, have been tapping into the wealth of the affluent for a while, newer funds launched in this segment have also started to compete for this pool of money. According to Sebi data, more than a 100 AIFs have been registered in the country since 2012. While alternative investments currently make up less than 10% of the rich person’s portfolio, according to the Kotak report, the segment is set to grow rapidly as the number and variety of offerings increase, perhaps offering them a wider set of investment options.

Ira Dugal is assistant managing editor, Mint.