Equity? Not for us? We are the super-rich. We like FDs

Even the rich are running scared of equity, despite tempting current valuations.

Wealth managers may be chasing high net worth individuals (HNIs) to manage their money aggressively, but the hot, new investment idea that seems to be captivating them is fixed-income, capital-protecting instruments, reports The Indian Express, citing the Merrill Lynch Global Wealth Management report.

India’s HNI population rose by around 20.8 percent in 2010 and their wealth is estimated to have grown by more than 11 percent at $530 billion, of which almost one-third had been invested in equities. “However, the uncertainty prevailing globally in several asset classes, leading to frequent volatility, has impacted the investment sentiment of the HNIs. Now, the focus is more on capital-protection products than on equity,” said the report.

[caption id=“attachment_317387” align=“alignleft” width=“380” caption=“Many HNIs are now opting for fixed-income products, giving a pass to equity instruments.”]  [/caption]

Even though current valuations offer blue chips at bargain-basement prices, HNI investors are waiting for the tide to turn before risking their cash. “Despite midcaps being available at such cheap valuations, nobody is prepared to even notice them. I think high net worth individuals (HNIs) are waiting on the sidelines with a pick-and-choose kind of approach”, said Dilip Bhat of Prabhudas Lilladher i n an interview with CNBC TV18.

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If the pre-Lehman era of high growth saw the super-rich investing heavily in equities as the markets were rising to new peaks, many HNIs are now opting for fixed-income products, giving a pass to equity instruments. Not surprising, with the BSE Sensex giving negative returns of (-)11.1 percent over the last one year when tax-free government bonds are yielding 8.2 percent.

HNIs have thus shifted their money to instruments such as tax-free bonds issued by infrastructure companies, fixed maturity plans, private placement bonds, and term deposits of banks which offer guaranteed returns. State-owned institutions such as REC and NHAI, which issue capital gains and tax-free bonds, have sold papers worth Rs 7,700 crore to high net-worth individuals.

According to Pradeep Dokania, managing director and chairman of Merrill Lynch global wealth and investment management, Indian high net worth savings are classified into five vehicles, of which real estate is the largest investment avenue, followed by fixed income, gold, silver, cash and equity - equity being the smallest asset class.

Till clarity emerges on the economic front and equity again becomes a preferred choice, gold ETFs (exchange-traded funds) have become another hot favourite for HNIs. According to mid-year data for gold funds released by the Association of Mutual Funds in India (Amfi), the total number of folios under gold ETFs stood at 4.28 lakh accounts in September 2011, 75 percent higher than in 2010. From 5,433 HNI accounts in September 2010, gold ETFs rose to 10,361 accounts at the end of September 2011. Global uncertainty, high inflation and the relative convenience of gold investment through ETFs are driving demand for gold funds, a financial expert told Firstpost.

A report by Karvy Private Wealth says alternative assets like direct real estate, unlisted private equity, structured products and direct art will be the fastest-growing segments in the coming years. “Alternative assets are meant for sophisticated HNIs who have more than Rs 10 crore of investible surpluses and a time horizon of at least five years. Depending on the risk-taking ability, investors could allocate 5-15 percent of their portfolios to such assets,” said Rajesh Saluja, MD and CEO, ASK Wealth Managers.

But, right now, safe, capital-protecting investments will do just fine, thank you.