This article is a gist of Kotak Wealth Management's annual report, “Top of the Pyramid” 2016 edition. It throws light on the spending, investment and lifestyle patterns of ultra HNIs in the context of the country's changing socio-economic conditions.

It includes insights for partners who deal with or wish to deal with the most sought after segment of clients – ultra HNIs

Market Size

India's robust GDP growth has led to an improved ultra HNI sentiment. The number ultra (high net worth Households) HNHs has grown to 146,400 in FY 16 from 137,100 in FY 15, a growth rate of 7% and a compounded growth rate of 16% over the past 5 years. An ultra HNH is defined as a household with a minimum net worth of INR250 million, mapped over 10 years. It is estimated that the number of ultra HNHs will increase to 294,000 by FY 21 with a combined net worth of INR 319 million. While 55% ultra HNH concentration is in metro cities, the remaining 45% is with emerging cities and smaller towns, especially in inheritor and entrepreneur categories.

The average age of Indian ultra HNIs is falling, and nearly half of them are less than 40 years old. Increasing number of start ups has led to a fall in the average age.

Classification of Ultra HNIs

The report classifies ultra HNIs into three categories - as an entrepreneur, inheritor or a professional.

1. An entrepreneur strives for self recognition and achievement and believes that his wealth should strictly go to his immediate family. He spends to attain a luxurious lifestyle and has an opportunistic approach to investing.

2. The inheritor works for wealth preservation and growth, he too persists that wealth should remain within the family. He spends to maintain a luxurious lifestyle and has an organised and planned approach to investing.

3. The Professional works for self actualization and believes that his family must strive to earn for his wealth. He looks for value for money and has a disciplined and planned investment approach with systematic goals.

Spending Behaviour:

Falling inflation has resulted in rate cuts leading to a fall in lending rates. Hence, the ultra HNIs are substituting savings for investments in primary business or in wealth generation avenues. Out of the total, ultra HNIs have allocated 14% to savings and 16% to investment for personal wealth and 23% for investment into primary business.

Jewelery, holidays, apparel, automobiles and home décor account for 68% of total spends. Designer wear and expensive accessories are holding their places tight within the Indian ultra HNIs.

Art and paintings form an integral part of ultra HNIs' portfolio. These purchases are not backed by thorough research but by impulsive buyer behaviour. The ultra HNIs buy art to pursue their passion and also for status, making it an alternate investment avenue.

The inclination towards 'wearables' has recently increased among ultra HNIs. Wearables include wearable electronic devices like smart watches, fitness bands, smart glasses, virtual reality headsets and sleep headphones. 61% of ultra HNIs between the ages of 36 and 50 years were eager to adopt wearable devices against 55% adoption among the below 35 age group.

Th quest for collectibles has descended from the Maharajas to the ultra HNIs. About 65% of ultra HNIs collect electronic gadgets, luxury cars account for 63% of ultra HNIs' collections, followed by art & paintings and sports bikes.

Succession Planning: Almost 98% of Ultra HNIs believe in succession planning and 81% of them give it high importance.

• Ultra HNIs understand that succession planning is a proactive and a continuous process and not a reactive one

• Their plan is to identify potential leaders, groom them and encourage them to look beyond their immediate responsibilities

• With changing education system, successors are being inducted in business at an early age as management trainees, so that they can understand the fundamentals of the business and get to know the key people in the organisation

• 43% of ultra HNIs prepare for at least five years to put succession in place, while 35% take between two to five years

• Successors also pursue family business management programs offered by various colleges, along with the hands on training

• Daughters are also becoming an integral part of succession planning. Ultra HNIs are looking for suitable successors who are capable to take the business to another level

• Kids of Ultra HNIs take the first place in the list of successors, followed by other high potential family members or external candidates

• People are gradually relying on professional estate planners, trustees and wealth advisors for succession planning

• Ultra HNIs prefer to pass on their assets though a simple Will

• Ultra HNIs are working on succession and retirement plans simultaneously. They are opting for various post retirement funds and insurance schemes to secure the future for themselves and their families.

Investment Pattern:

The main source of wealth of ultra HNIs is succession. There is a decrease in the number of Ultra HNIs from sale of business or from real estate sector. 'Impact investing' segment i.e. investing in social entrepreneurship businesses that focus on sustenance is on the increase.

Indian Ultra HNIs invest across equity, real estate, fixed income and alternative assets.

• Equity investments saw a decline as a result of 20% fall in Indian equities

• In the debt market, tax free bonds of PSUs has drawn a positive response from ultra HNIs

• Real estate investments saw an increase, with commercial properties being the center of attraction.

• Ultra HNIs invest in commodities, gold is the favourite. The Gold Monetisation scheme launched by the government has also appealed the Ultra HNIs. 49% of ultra HNIs invest more than 10% of their assets in commodities and 59% of these invest in Gold. With the merger of Forward Markets Commission and SEBI, the future of Indian commodity markets seems bright.

Ultra HNIs are enthusiastic about adopting and promoting renewable energy. They undertake various initiatives, such as water and energy conservation, recycling and reusing plastic bags and waste segregation. The Ultra rich have always been generous towards charity. The approach has slightly changed, they want to build enterprises that not only create a positive difference in society, but ones which are self sufficient, economically viable, and lasting. This is called Impact investing.

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About the Report:
In this week's article, we are sharing the insights from the recently released investor survey by DSP BlackRock. BlackRock conducted the annual survey of 31,139 people this time across 20 markets, in conjunction with Cicero Group, a research agency. India has been included in the survey since 2014 and this year, it was conducted online among 1,500 respondents aged 25-74, who had a role in financial decision making.

Key Findings (India Specific):

Investor Sentiments:
Despite global economic uncertainties, financial sentiment among Indians (84%) is the most positive of all markets surveyed (global 56%).
The confidence of financial decision making (savings & investments) is also very high in India (82%) compared globally (53%).
High cost of living and healthcare costs are prevalent concerns, prompting Indians to make ‘saving money’, ‘growing their wealth’ and ‘long-term healthcare’ some of their top financial priorities.
Most respondents feel that issues such as India’s economic performance, job market and economic reforms have either improved or remained consistent over the past year.
Indian stock market performance, infrastructure development and the government’s economic and development reforms inspire the highest confidence levels, while affordability of real estate is a concern.
Indians associate financial independence to earning own income and never having to ask money from others.

Asset Allocation & Investment Trends:
India has among the highest incidences of savings (97%) and investments (85%) among all global markets surveyed (83% & 53% respectively).
Respondents acknowledge that they are over-exposed to cash (22% of total holdings) and deposits (24%) and believe that they should lower their allocation (to 18% each) in these asset classes.
Respondents acknowledge that equity mutual funds (6%) and debt mutual funds (3%) have a lower exposure which needs to be increased in their total portfolio (to 8% & 5% respectively).
Physical assets such as property and gold are still popular among investors.
Almost half would like to increase their exposure to stocks and equity mutual funds over the next 12 months
Indian respondents appreciate the growth potential and value creation from equities including mutual funds, however, they still like the perceived assurance from traditional asset classes.
Indians are looking to reduce their exposure to idle cash and invest their money in other asset classes. Better knowledge about investing would encourage 41% of respondents to move more of their cash into investments. Guaranteen returns is however a greater motivator with 47% of respondents willing to move cash into investments in response to this factor.

Investment habits & decision making:

• Over 80% of Indian respondents feel that they take financial planning seriously and that having a financial plan gives them peace of mind.
• Family plays a major role for Indian respondents in their investment decision making. When it comes to long-term savings and investments, family and friends (49%), banks (46%), online sources (43%) and financial advisors (34%) are the most common sources of information.
• Retirement (50%), children’s education (46%) and buying a home (33%) are the top three investment goals for Indian respondents.
• 61% of household financial decision-making is made independently by a single member of the family. When the responsibilities are shared for remaining 39% of times, it is mostly shared with the spouse - for nearly 80% of the time.
• When household financial decision-making responsibilities are shared, only 31% of women respondents are likely to make the final decision compared to 60% of men.
• Around 60% of male respondents feel that their spouse knows as much or more than them when it comes to their investments while the corresponding figure for women respondents is over 90%.

Relationship with financial advisor:

• When asked who is the first person to come to mind when hearing the words 'financial advisor, the top two responses included 'family' (38%) and 'IFAs' (25%) followed by CA (10%). For men respondents, IFAs had the higher mind share (30%) closely followed by family (29%). For women resondents though, family (48%) had the highest mind share followed by IFAs at (20%).
• 58% of Indian respondents are using financial advice, with a higher percentage of women (65%) taking financial advice as compared to men (52%).
• 77% of advised Indians use a financial advisor for most or all financial decisions, with a higher percentage of women (79%) again as compared to men (75%).
• Nearly all advised respondents where found to be satisfied with their financial advisors.
• 83% of advised Indians pay a fee for financial advice, and 88% of those advised believe they are getting excellent or good value for their money.
• Of those who do not pay a fee for financial advice, a majority (78%) would still retain their financial advisor if they started charging a fee.
• Seeking new investment ideas and minimizing risk while investing are the most discussed topics with financial advisors.
• Women place highest value on the ability of a financial advisor to explain financial matters in a manner that they understand. Men place highest value on the ability of financial advisor to minimise risk when investing followed by the ability to protect savings /investments from inflation.

Retirement:

• Most Indian respondents recognize the need to plan for retirement and are investing specifically for it (80%).
• While Indian respondents feel confident that they will achieve their desired annual retirement income (88%), they still express concern (71%) that they won’t be able to live comfortably post retirement.
• Most Indian respondents who are saving for retirement, mentioned ‘high cost of living’, ‘child’s education’ followed by unplanned expenses as key factors making it difficult to save for retirement.
• Those respondents who haven’t started saving for retirement mentioned ‘other priorities’ and ‘not earning enough money’ as reasons why they haven’t started yet.
• Indian respondents seemed to significantly underestimate the corpus they would need for a comfortable retirement

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In this week's issue, instead of an article, we have chosen to give you a glimpse of the industry and it's trend ending December 2015. We hope this analysis will help you get some valuable insights into the industry and its' composition.

Key Observations:

• Assets managed by the Indian mutual fund industry has grown from Rs. 10.51 trillion in December 2014 to Rs. 12.75 trillion in December 2015. That represents a 21.26% growth in assets during CY 2015.

• The Equity asset class registered an impressive growth of nearly 27% during CY2015 in AUM. The composition of Equity oriented schemes have risen during the year and it stood at 31.28% in December 2015.

• The Debt asset class registered a growth of 12.10% during the year but it's composition fell by nearly 3.68 in absolute terms in the overall assets.

• As a category, most impressive growth in assets was recorded by the Balanced schemes of over 72%, followed by Liquid Funds at over 30%.

• There are 45,853,274 folio accounts in the mutual fund industry as at December 2015, of which 99% is accounted for by individual investors.

• As per AMFI, individual investors now hold almost the same share of industry’s assets, i.e 45.9% in December 2015, compared with 46.0% in December 2014. Institutional investors account for 54.1% of the assets, of which corporates are dominant with 86.5% of assets. The rest are Indian and foreign institutions and banks.

• The institutional investors have a share of over 92% of assets in Liquid Funds but only 17% in Equity Schemes where individuals are the prominent asset holders. In Debt asset class too, the institutional clients dominate with 61% holding of assets.

• As per AMFI, 59 % of total individual investor assets are held in equity oriented schemes followed by Debt at over 36%. Individual investors held only 4% in liquid funds and less than 1% in ETFs & FoFs.

• Nearly 81% of the investor folio accounts are in Equity schemes while 17% folio accounts are in Debt funds. Liquid and money market funds account for less than 1% of folio accounts.

• Individual investors account for the most of the accounts, across fund types. In liquid and money market funds, they hold the least number, at about 92% of the total accounts. Instituional investors have only 0.8% of folios in Equity funds but have nearly 17% of assets.

• 37% of the industry assets came directly. A large portion of the direct investments were in non-equity shemes where institutional investors dominate. Only 10% of retail investors assets are invested directly while 15% of HNI investor's assets (ticket size above Rs.5 lakh) were invested directly.

• Equity assets have a longer average holding period as compared to non-equity assets. 37% of equity assets have been held for periods greater than 24 months. Non-equity assets have been primarily held for periods less than a month (institutional assets in money market) or less than a year (other debt schemes).

Source: Information has been collated from AMFI & SEBI websites.