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The investment landscape for high net-worth individuals (HNIs) is buzzing with action. Many asset management companies have introduced innovative schemes of portfolio management services (PMS) and Alternative Investment Funds (AIFs) to help HNIs diversify their investments.

Fund managers of such PMS & AIF try to ensure the risk-reward ratio is favourable and tailor-made for investors as per their risk-appetite and investment horizon. While the minimum investment limit for PMS is 50 lakh, it is 1 crore for AIFs. A plethora of PMS schemes and three categories of AIFs are available in the market. Category I AIFs invest in start-ups, SMEs or social ventures. Category II AIFs are close-ended private equity, real estate or special situation funds that invest in unlisted companies. Category III AIFs create complex investment strategies to invest in listed or unlisted securities.

Rising interest rates and volatile market conditions can provide opportunities for investors to generate higher returns in debt too. For instance, higher interest rates may increase the yield on fixed income investments, making them more attractive for investors seeking income-generating investments beyond bonds and debt funds. Similarly, hedged portfolios under alternative investments can provide better risk management in case of volatile equity market conditions. These are some of the alternative investments that wealthy Indians can consider:

Mid and small cap PMS: For mutal funds (MFs) and AIFs, fund managers pool money from investors to invest in securities. They do it individually in the name of an investor in his or her demat account in the case of PMS. The securities could be stocks, fixed income, debt, cash, or structured products. PMS schemes offer investors an opportunity to invest in concentrated and special themes as per their preferences.

For 2023, investors may be better off having their core large cap portfolio in index funds while the satellite allocations in mid and small cap can be done in equity PMS schemes with a longer and superior track record. The precondition is that the overall investment portfolio needs to be at least 2 to 2.5 crore to ensure that the PMS allocation is not more than 15-20 %

Hedged AIF portfolios: Given the perceived uncertainty of 2023 in face of the global recessionary waves, some investors may want to look at the option of limiting the downside in their portfolio, in case of a huge fall in the stock markets, even though that may have a very low probability.

There are options for such investments under Cat-III AIFs. These funds employ complex derivatives strategies to maximise risk-adjusted returns. One example of this is a long term hedged portfolio, where addition of derivatives to the portfolio helps curb losses in a falling market. Another example is long-short funds, which can be considered when the market is expected to remain range bound for longer periods of time These funds are meant for those who don’t wish to take high risk on their capital as they are not totally bullish on the stock market.

Private credit AIFs: This is an interesting high yield debt option for 2023. Private credit funds are pooled investment vehicles wherein fund houses launch an AIF to collect money and give it to unlisted companies as a structured loan. These could be real estate funds, special situation funds, venture debt funds or distressed funds. They fall under category II AIFs. This investment avenue has gained more traction as India looks to become a $5 trillion economy. While banks and non-banking financial companies are doing a great job of lending to big businesses and small and medium enterprises, a big chunk of smaller companies are out of their credit universe. MFs, too, stay away from such perceived high-risk credit.

Private credit funds meant for HNIs fit the bill where the regular post-tax returns are much higher than traditional instruments like bank fixed deposits, bonds and debt funds. Some select AIF fund management teams have devised in-house risk assessment tools to hunt for quality companies looking for funds for expansion. These funds are suitable also for those who seek regular cash-flows from their investments but know that they face a higher default risk than traditional investments in debt.

In conclusion, alternative investments can offer attractive diversification benefits and higher returns for HNIs and wealthy Indians. However, investors must conduct their own due diligence and also seek professional expert advice before investing in such alternative investment avenues.

Abhijit Bhave is chief executive of Fisdom Private Wealth

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Updated: 29 Mar 2023, 06:25 AM IST
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