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    Retirement Planning: How Are HNIs Diversifying Their Investment Portfolios?

    • 5 min read
    • Last Modified Date: February 7, 2024
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    Over the past decade, there has been a notable shift in India’s investment landscape. This includes shifts in ultra-high net worth individuals’ (UHNIs’) and family offices’ risk tolerance, asset selections, and allocation strategies. 

    Financial advisors work with high net worth individuals (HNIs) to help them plan for retirement and provide for their children’s futures. In the past, the former has been accomplished by using private trusts, which release money when the child reaches a specific age, and the latter by investing in a basket of securities that offer a monthly cash flow.

    What is HNI (High Net Worth Individual)?

    High net worth individuals, often referred to as HNWIs or HNIs, are individuals who have a significant amount of wealth and financial assets. In general, these people are considered to have a net worth of at least $1 million, exclusive of the value of their principal residence. 

    If you belong to the HNI category in India, congratulations, as you are among the top 1% population of the country. To secure your retirement, you must save and invest your money wisely in addition to earning it.

    How HNIs Manage Their Wealth?

    HNIs use a variety of strategies to manage their wealth, such as estate planning, investment management, and tax planning. 

    HNIs have generally depended on a combination of debt and equity investments to help them plan for retirement and provide money to their children. However, there has been a shift in the industry lately towards more alternative asset classes that offer instruments that better align cash flows with inflation and liquidity.

    Commercial real estate is one such asset class where allocation has increased significantly. Commercial real estate provides 8-12% annual returns through rental yield and an opportunity to participate in the appreciation of the underlying property, giving it characteristics of both debt and equity. 

    The principal amount is also much safer because it is a real asset. The annual rent increases linked to inflation are the cherry on top. Most commercial leases have a strong inflation protection clause that increases by 5% annually or 15% every three years.

    Why is retirement planning for HNIs important?

    Retirement planning is essential for every individual. It’s similar to planning for a time when you want to live a comfortable, worry-free life but won’t be working. Retirement planning, especially for high net worth individuals (HNIs), guarantees that they can continue living the way they do in retirement, which may involve taking regular trips and leading a relaxed lifestyle.

    Retirement planning also makes sure that investments and savings increase at a rate that keeps up with growing costs, such as medical expenses, without straining the HNI’s finances. HNIs typically own a variety of assets, such as stocks, real estate, companies, and other assets. Proper retirement planning helps optimize these assets for a smooth transition into retirement.

    Furthermore, HNIs often have a desire to leave a substantial inheritance for their children or charitable causes. Retirement planning allows them to set aside money for these things while still taking care of their own financial security. For HNIs, handling taxes and investments can also be tricky. By carefully managing their retirement funds, they can find ways to pay less in taxes. Additionally, it helps them manage stock market swings, guaranteeing a consistent income even in volatile markets.

    Retirement planning strategies for HNIs

    The goal of retirement planning is to facilitate retirement and guarantee a seamless transfer of assets, including businesses, real estate, and legacies, to future generations. Some of the popular retirement strategies for HNIs are explained here under.

    Creating a retirement budget

    This is one of the primary steps in retirement planning for any individual and HNIs are no exception.  For high net worth individuals (HNIs), developing a retirement budget is particularly crucial in order to assess their financial requirements, sustain their way of life, continue their side projects into retirement, and provide enough funds for them. HNIs can use online retirement planning calculators to estimate their income and expenses and make appropriate plans, even though this requires careful analysis. When performing this activity, it is crucial to take various factors into consideration, such as inflation, healthcare costs, taxes, emergency fund, etc.

    Diversified Investment Portfolio

    High Net Worth Individuals adopt a strategy of diversification in their investment portfolio. To reduce risk, they distribute money among several asset classes, including real estate, fixed income, equities, and alternative investments. 

    The idea behind this strategy is that there are differences in the degree to which different asset classes are correlated with market movements. Thus, in the event that one asset class underperforms, the possible losses may be outweighed by the success of other asset classes. Over time, diversification aids HNIs in achieving a balanced portfolio that strikes a balance between growth and stability and to earn resilient returns.

    Investment bucket strategy

    HNIs can arrange their assets according to different risk profiles and time horizons by using the investment bucket strategy. They divide up their investments into various “buckets,” each of which is assigned a particular set of financial objectives. 

    Short-term buckets store liquid assets at low risk while meeting urgent needs and emergencies. Investing in medium-term buckets means setting aside money for things like college costs or a down payment on a home. Long-term buckets are invested in higher-risk, higher-return assets and are intended for retirement and wealth accumulation. This method makes it easier to manage money effectively and matches investments to personal objectives.

    Asset protection strategies

    HNIs should include wealth preservation in their retirement planning as it is of utmost importance. As such, it necessitates the use of complex asset protection techniques. To protect assets from possible risks and legal claims, this may involve forming trusts, limited liability companies (LLCs), and family limited partnerships. HNIs protect their wealth, facilitate a smoother transfer of assets to heirs or beneficiaries, and protect their retirement interest by separating assets and building legal barriers. 

    Seek professional advice

    Retirement planning can be difficult and complicated, particularly for HNIs with numerous assets and income streams. Therefore, it is wise to seek expert advice from a certified financial planner, who can assist them in creating a personalized retirement plan that fits their preferences, risk tolerance, and goals. A financial planner can also assist with keeping an eye on the retirement plan and adjusting it as necessary. 

    Explore investment opportunities with Assetmonk and earn enticing returns.

    What are the factors to consider when planning for retirement for HNIs?

    • The primary consideration while planning for retirement is by defining and assessing the current financial position, retirement goals and the expected income level needed in the retirement phase. To effectively plan for retirement and make sure that all of the objectives are completed on schedule, this clarity is crucial.  
    • The rising rate of inflation and the anticipated income level needed in the next 20 or 30 years are significant additional factors to take into account.
    • The age at which you start retirement planning also influences retirement planning. Early retirement planning allows high net worth individuals (HNIs) greater freedom in selecting their retirement options and achieving their objectives in a timely, cost-efficient manner.   
    • Periodically rebalancing the portfolio is equally important to make sure that it is updated and modified to meet HNIs’ changing or evolving needs and to eliminate investments that no longer align with their investment goals or their perceptions of risk-return. 

    HNIs Growing Interest in Commercial Real Estate

    According to the annual Luxury Outlook Survey 2023 conducted by India Sotheby’s International Realty (ISIR), a staggering 75% of High-Net-worth Individuals (HNIs) and Ultra High-Net-worth Individuals (UHNIs) think real estate will do well over the next two to three years, and a similar percentage (74%) think real estate is an important asset to hedge against inflation.

    61% of HNIs and UHNIs plan to purchase real estate in 2023–2024, demonstrating the continued appeal of real estate as an investment vehicle. Rich investors have a preference for high-rise apartments (34%), which are closely followed by farmhouses and vacation homes (30%). Commercial real estate with a yield is also in demand; according to the HNI survey, 23% of respondents would like to invest in it.

    45% of HNIs and UNHIs agreed to consolidate their real estate portfolio for a switch to higher quality property and income generation.

    A new way to own luxury assets: The Fractional ownership model

    Following the pandemic, mobility and leisure travel have increased significantly, and India’s fractional ownership market  is increasingly becoming mainstream. 

    According to industry experts, fractional ownership of real estate is quickly becoming a viable investment option in India for investors, especially high net worth individuals (HNIs), and even end users. This could help them generate consistent returns of 8–10% from the growing real estate market. The Indian fractional ownership market is expected to grow from Rs 1,500 crore in 2019 to Rs 4,000 crore in 2023, according to estimates.

    The Securities and Exchange Board of India (SEBI) announced in a recent update that it will regulate the online platforms that provide fractional ownership in real estate. According to the SEBI, these platforms will be registered under the small- and medium-sized real estate investment trust framework.

    To put it simply, fractional ownership gives investors the opportunity to own a portion of valuable real estate for a much lower price than they would have to pay to purchase the entire property outright. In proportion to their investment, even investors on a tighter budget can purchase shares in high-value properties.

    The fractional ownership options offered by Assetmonk offer long-term retail investors a great opportunity to get exposure to the CRE market.

    Bottom Line

    For each person, retirement planning is an essential part of financial planning.. It becomes more pronounced for HNIs due to the complexities of tax planning, estate planning, legacy planning and philanthropic endeavors aimed by them and more.

    When planning their strategies from a long-term perspective, HNIs prioritize concentrated portfolios to create more wealth than retail investors, who prefer to diversify their portfolios to preserve their wealth.

    Success in the financial world as a high-net-worth individual in India demands a well-rounded strategy. Remember, it’s not just about accumulating wealth; it’s about preserving and growing it wisely.

    With an exceptional guaranteed Internal Rate of Return (IRR) of 17% and higher, Assetmonk is proud to be at the forefront of the alternative investment space. Our investment opportunities are backed by the inherent security of real estate, assuring our investors of a secure future. Invest as little as 10L to unlock a world of potential financial growth and become the next wise investor. Experience the smartest way to invest with Assetmonk and embark on a journey towards a prosperous future.

    Reference Links

    1. How To Invest 10 Lakhs Rupees For Monthly Income in India
    2.  Retirement Planning in India
    3.  How To Invest 25 lakhs for Monthly Income.

    FAQs

    Q1. What is a diversified retirement plan?

    A. It involves creating a range of saving and investing assets that make up your portfolio.  By avoiding putting all of your money in one investment, this helps to ensure a steady retirement income. A decline in one investment can be countered by growth in another in a diversified portfolio.

    Q2. What is the best investment strategy for retirees?

    A. Assetmonk may be the best option for you to invest in commercial real estate properties. Real estate investment company Assetmonk provides high asset liquidity, assured asset appreciation, and annual internal rate of return (IRR) of up to 21%.

    Q3. How do you manage risk and retirement investments?

    A. Keeping your portfolio with a specific mix of investments that you think will yield the return you want at a risk you can afford to take is one smart way to invest during retirement.  Asset allocation is the process of building such a portfolio and distributing your risk.

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