Financial planning for High Networth Individuals..!

Financial planning for High Networth Individuals..!

From UTI MF

HIGH NETWORTH INDIVIDUALS (HNIs) COME WITH A POOL OF MONEY AND THEY DEMAND SPECIAL ATTENTION WHEN IT COMES TO FINANCIAL PLANNING

The initial process of financial planning for a high networth individual (HNI) and a retail investor is the same, like goal setting, risk profiling etc.

However, once the initial process is taken care of, the process differs substantially from the execution part. Usually HNIs come with a large pool of money, and using that large pool of money to create further wealth is always a serious business and challenging too.

According to financial planners & advisors, taxation related issues for HNIs are also very tricky and planners or advisors should be very careful while dealing with such issues.

Financial planners say that often HNIs come with a large pool of money but they need help in structuring their plan and also some handholding so that they do not lose track of their money and wealth.

One of the first differences between how the money is deployed for an HNI and that for a retail investor is that in case of the former, the deployment is mostly a lumpsum amount or through a systematic transfer plan (STP).

In contrast, in case of a retail investor the main approach is about building a corpus over the long term. In case of HNIs, the approach is to make money work and also to spread the risk in the overall portfolio in a judicious manner.

However, financial planners should keep in mind that although HNIs come with a large pool of money, it does not mean they can take any amount of risks, said Hemant Rustagi, CEO, Wiseinvest Advisors.

“It's true their risk profile is high. And so they can invest higher percentage of their money in market-linked products than retail investors. However, the approach should never be to put all the money into equities. The approach should not be very aggressive,“ Rustagi said.

According to financial planners & advisors, here also the approach should be to segregate goals into long term, medium term and short term goals. For long term goals equity should be the preferred mode, for the short term investments should be in debt products while for the medium term a balanced approach, a mix of debt and equity, should be adopted.

Within these three categories, however, given HNI customer's higher risk taking ability, one could settle for products which have slightly higher risks than other products in the same category.

Financial planners and advisors also said that taxation should be an integral part of the financial planning for every HNI investor.“Tax efficiency of investments done by HNIs is very important,“ Rustagi said. So financial planners and advisors adopt innovative strategies for their HNI clients.

For example, in equity and equity oriented mutual funds, there is no tax implication for holdings that exceed one year. On the other hand in debt mutual funds to take advantage of the indexation benefits, which lowers tax outgo substantially, one needs to hold on to such investments for more than three years.

Now suppose an HNI investor needs to keep money after about two years. But keeping this money in pure equity funds may be risky while if the same is kept in debt funds, he will not get indexation benefits. 

So, financial planners and advisors often use arbitrage funds that qualify as equity funds but give debt fund like returns for such investments of more than one year but less than three years.

Again, for example, someone wants to park their funds, say for nine months or so. In such a case, it is better to advice the HNI to invest in the dividend option of a debt fund, rather than in the growth option.

This is because since this is an investment of less than three years, in growth option , the investor will have to pay short term capital gains tax at 15 per cent rate. However, tax outgo in the dividend option will be less.

So while planning for HNIs, it is not only required to look at products, but one should also look at options within each product category for highest tax efficient returns.“Fortunately there are products within the mutual fund space which, if you choose judiciously, you can enhance your post tax returns,“ Rustagi said.

On the issue of real estate, however, HNIs do not need much help, Rustagi said. Given Indians' affinity for real estate, they usually come with some properties or other.

“Usually what is missing in the portfolio of an HNI is the financial assets, and that is where they need help,“ Rustagi said.

Question

WHAT ARE THE CHALLENGES IN DRAWING AND EXECUTING AN OPTIMAL FINANCIAL PLAN?

Answer;

The key challenge while drawing a financial plan is to align the aspirations of the head of family and the next generation. Another difficulty is that as the quantum of wealth grows over several years, existing assets become too scattered. 

On the execution side, the common challenge is to stick to a predefined time horizon for every investment and align the assets as per the asset allocation strategy, which is derived through the financial plan.

Question:

HOW CAN MUTUAL FUNDS HELP IN WEALTH CREATION?

Answer;

A mutual fund is an investment vehicle with a pool of funds collected from investors to buy securities such as stocks, bonds, money market instruments and similar assets thus having the power of scale.

There are many advantages of investing through a mutual funds, of which two primary benefits are professional management of one's money and a diversified portfolio of securities.

However, if one wants to create wealth through mutual funds, there needs to be an optimal investment plan in place.

Question

WHAT IS THE IDEAL BALANCED INVESTMENT STRATEGY? INVEST IN EQUITY AND THEN MOVE TO DEBT OR VICE VERSA?

Answer;

We believe investments should be kept as simple as possible and smooth in order to derive the expected returns. An ideal investment strategy should be derived from asset allocation, which needs to be achieved as per the financial plan.

Pursuant to which the assets should be purchased or sold as per the shortfall or excess holding of a particular asset. In any case, moving investments from equity to debt is used more often for profit booking and moving from debt to equity for buying at reasonable valuations and in staggered manner such as systematic transfer plans.

Q

IS INVESTING IN FIXED DEPOSITS MORE LUCRATIVE THAN MUTUAL FUND AS IT IS MORE SECURE AND HAS ASSURED RETURNS?

Answer;

No. Debt market and products require a deeper understanding when compared to many other assets. However, if an investor does not have a bandwidth for this, FDs are the best bets for him. In all other cases, a well planned debt mutual fund strategy will deliver high inflation-adjusted returns compared to FDs at the same time mitigate the risk to be at par with FDs.

From UTI MF ADVT

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