For Indian investors, structured products are the way to wealth

Though the World Wealth Report last year had anticipated a reduction in real estate allocation for 2006 due to expectation of higher interest rates, their report this year highlights a significant increase in the allocation to 24 per cent compared to 16 per cent in the previous year. Investors looking for income generating investments in the form of rents or dividend fuelled the demand for commercial properties.

The growth in the real estate allocation has been at the cost of alternative investments, a category which halved to 10 per cent of asset allocation in 2006, from 20 per cent a year ago. The report highlights that this is a temporary tactical move by investors seeking higher returns from real estate. This category includes structured products, hedge funds, derivatives, commodities, foreign currencies, private equity, venture capital and investments of passion. Global allocations to this asset class had steadily increased from 10 per cent in 2002 to 20 per cent in 2005.

With increasing interest rates in the last few years, investors moved from fixed income to this asset class, and the growing stock markets created the need for diversification. Structured products allow investors to diversify their portfolios, hedge against volatility, reduce risk and get capital protection on their portfolios. It also helps capitalise on volatility of underlying assets and can be developed to suit a specific view an investor has on any underlying such as indices, interest rates, currencies, basket of securities, commodities and so on.

Last year saw reduced volatility, much below historic averages resulting in reduced allocation to this asset class. With increasing volatility, there would continue to be opportunities for investors in structured products. Market cycles and changes in investor’s risk appetite would continue to drive the need for diversification, hedging against volatility and capital protection, ensuring investor interest in alternative investments.

The World Wealth Report 2006 for Asia Pacific highlighted that in 2005, Indian HNWIs had 31 per cent in equities, 20 per cent in alternative investments, 19 per cent in fixed income, 17 per cent in real estate and 13 per cent in cash or deposits. While the 2007 report has not yet been published, the year 2006 saw increased allocation to real estate and alternative investments in India.

However, the increase in interest rates this year has raised the borrowing costs by over 5 per cent, reducing the purchase of second homes and real estate as investments in India. Increase in interest rates also saw the emergence of the fixed income category, especially fixed maturity plans, and allocation to this asset class has increased.

In India, over the last few years, there has been a sustained surge in the stock markets, increase in volatility and growth in real estate prices. The Indian investor, driven by his need to secure what he has gained and given the high returns he has made, has started to seek capital protection and products that help him reduce the risk in his investment portfolio.

The structured note market has started to develop in India and is in the form of non-convertible debentures and structures embedded in portfolio management services (PMS) portfolios. These notes are structured as discount bonds, where in the payout is linked to the performance of an underlying which could be an equity index or a basket of securities. Notes linked to commodities such as gold, oil and so on are likely to be launched in the next few months. While high net worth investors are keen to look at complex structures which either helps to hedge their portfolio or play out their view on the underlying, smaller investors are getting a chance to participate in this market due to the reduction in the minimum ticket size of investment.

Structured notes, real estate venture capital funds, art funds and the much awaited real estate and commodities mutual funds and PMS would give Indian citizens, particularly the HNWIs, to invest and grow their wealth in India. Efficient management of their wealth and underlying growth in their incomes would surely help India maintain its leadership position as one of the fastest growing HNWI population globally.

The author is country investments director (global consumer group), Citibank