This growth is underpinned by the ‘Triple Multiplier Effect’ – the confluence of rising High Networth Individuals (HNI) investors, asset appreciation, and savings from incremental growth in income. Further, the future of wealth management will be contingent upon the ability of wealth managers to meet the complex needs of a new generation of HNI investors.
Emergence of India’s HNIs and investors
Industry estimates suggest that the number of high net-worth individuals (HNIs) in India is growing at 16% annually and is likely to reach 1.67 million by 2027. This is a function of new wealth creation and the emergence of new investors in the country. On one hand, promoters in the top NSE 500 companies have collectively sold shares worth approximately ₹3 trillion since FY23. The resulting liquidity and mobilisation of wealth is indicative of a growing HNIs and UHNIs segment. On the other hand, the number of income tax returns (ITR) filed for income exceeding ₹10 million has grown at a CAGR of 18% over the past decade. Compared to the 10% growth in the total number of ITR filings, the difference points to an expanding higher income bracket and is a leading indicator for the creation of HNIs.
Significantly,
Non-metro cities are witnessing growth rates that not only rival but, in some cases, exceed those of major urban centres. This surge in wealth creation has led to a significant increase in both investor awareness and investment activity in these regions. For instance, the share of Assets Under Management (AUM) in mutual funds from areas outside the top 5 cities has grown dramatically, rising from 26.6% to 47.4% over the past decade. This trend highlights the expanding geographical distribution of wealth, emphasizing the importance of adopting a more inclusive approach that addresses the diverse needs of investors across different regions.
Asset appreciation and income growth
The investment behaviours of India’s HNIs is undergoing a notable shift, characterized by a transition from traditional assets to more diversified and sophisticated portfolios. Historically, investors have shown a strong preference for physical assets like real estate and gold. However, this is changing, with HNIs increasingly channelling their wealth to financial assets. This shift is evident in the growth of equities, provision and pension funds, and other financial instruments in their portfolios.
The share of equities in HNI portfolios has doubled from 2.2% to 4.7% in the last decade. Furthermore, HNIs are increasingly exploring alternative investment avenues like Portfolio Management Services (PMS), Alternative Investment Funds (AIFs), and Private Equity. This signals an increased confidence in equity markets and a deeper understanding of their wealth generating potential.
The potential returns from these assets are estimated to be within a range of ~12-15% for equity investments and 7-8% for fixed-income investments, such as bonds and fixed deposits. These returns could lead to an average appreciation of around 10% on Assets Under Management. Combined with the asset diversification trends and savings from incremental growth in income of HNIs, the wealth management industry could witness exponential growth over the next decade.
The evolving role of wealth managers
There is a discernible shift from a transactional approach to one that focuses on advisory services. Wealth managers will need to offer customised solutions tailored to the individual financial goals, risk tolerance, and life stages of HNI investors. In a competitive market, delivering a superior client experience is paramount to attracting and retaining HNIs. Wealth managers who provide personalised attention, proactive communication, transparent reporting, and a deep understanding of their clients’ financial aspirations will be better positioned to succeed.
As the investment landscape becomes increasingly sophisticated with the introduction of new asset classes and investment strategies, HNIs require specialised knowledge and expertise from their wealth managers. This includes a deeper understanding of alternative and emerging investments, access to exclusive opportunities, and the ability to manage risk across a diversified portfolio. Moreover, as technology continues to seep into every area of our lives, catering to the digitally savvy cohort of HNIs requires wealth managers to embrace technology to enhance service efficiency. This entails using data analytics for personalised financial insights and providing seamless digital experiences to clients through online portals and mobile applications.
Finally, if we look at the US, the total profit pool of wealth and alternate asset industry is 3-4 times of the Mutual Fund industry. In contrast, the profit pool for wealth managers in India is about half of asset managers. Over time, India might see a similar trajectory as the US markets. As people become wealthier, the need for wealth managers as well as a greater inclination and ability to invest in alternative assets also increases.
As new wealth gets created and distributed among a larger pool of individuals, the ‘Triple Multiplier Effect’ will likely intensify, thereby offering a substantial growth runway for wealth management firms in India.