"HNIs can add alternative assets like gold ETFs, commodities to jazz up investment portfolio"

Most Indians stick to traditional investment avenues like equities and bonds. At best, some of them would add some gold to their portfolios. However, an increasing number of wealth managers are now advising high net worth individuals (HNIs) to diversify their portfolios into alternative assets.

Direct real estate, gold ETFs, unlisted private equity, structured products and direct art are some of the alternative assets that are recommended to rich clients. Alternative assets account for 29,565 crore, or a mere 0.34% of individual wealth in India.

A report by Karvy Private Wealth says this will be the fastest growing segment in the coming years. "Alternative assets are meant for sophisticated HNIs who have more than 10 crore of investable surplus and a time horizon of at least five years. Depending on the risk-taking ability, investors could allocate 5-15% of their portfolio to such assets," says Rajesh Saluja, MD and CEO, ASK Wealth
Managers.

The need for alternative assets 

Alternative assets are non-traditional assets with potential economic value that is not found in a standard investment portfolio. Typically, these investments provide returns that have a low or negative correlation with traditional assets like equity and debt. They help increase returns and diversify risk. Some exotic investments like in yachts, rare stamps, fine wine or rare coins also fall under alternative asset category.

Typically, alternative assets are illiquid and hence investment is recommended with a time frame of more than five years. Poor liquidity makes it difficult to determine the true value of the investment in many cases. Due to the high risk involved, return expectations are also high. "Investors could expect a return of at least 20-25% from such investments," says Amar Ranu, senior manager, Motilal Oswal Wealth Management.

Direct investment in real estate 

Due to the severe liquidity crunch in the last couple of years, many real estate projects are stuck or proceeding at a slow pace. Wealth managers have found an investment opportunity in this space and are recommending direct investments in such projects.

"We identify distress properties, where builders are in a tight spot and the project is close to completion. If there is value in such deals, we recommend it to investors," says AV Srikanth, executive director, Anand Rathi Wealth Managers.

Unlisted private equity 

Today, a growing number of HNIs are willing to invest directly in start-up ventures that have a strong proposition or unlisted private equity. Depending on the opportunities available, investment is recommended either directly or through a private equity fund.

However, the risk here is much higher as compared to listed companies where corporate governance is high. "For aggressive clients who are high risk takers, we recommend a 4-5% exposure of their total equity portfolio to unlisted equities," says Sutapa Banerjee, CEO (private wealth), Ambit Capital.

Structured products 

As per Karvy Private wealth structured products are the most popular alternative assets in India, with 21,387 crore allocated to them in 2011. These are hybrid products -a combination of equity, debt and gold. Lower on the risk spectrum, with a tenor of 2-3 years, many such products come with capital guarantee, with a kicker in the form of participation on the upside of the underlying asset.

Take the case of an investor who invests 100, with a maturity of 2 years, 85 will be allocated to debt and 15 will be allocated to a basket of shares.