Mutual Funds have emerged as one of the preferred investment options for High Net Worth Individuals (HNIs) in India. With a minimum of Rs. 50 lakh invested across mutual funds, HNIs are able to generate decent returns by investing in the right kinds of mutual fund schemes. This article discusses some of the key considerations for HNIs when choosing mutual funds in India as part of their investment portfolio.
Investing in blue chip mutual funds
Most HNIs prefer to allocate a significant portion of their mutual fund portfolio towards large-cap blue chip mutual fund schemes. These funds invest primarily in large, financially sound and reputed companies. Though the returns may not be astronomical, the risk is relatively lower compared to other mutual fund categories. The blue chip mutual fund category offers stability of returns with moderate ups and downs over the long term. This makes them suitable for HNIs looking to play it safe with a large part of their investment.
Flexi-cap funds for higher returns
While large-cap funds offer stability, HNIs also explore flexi-cap mutual fund schemes seeking higher returns potential. Flexi-cap funds have the flexibility to shift their style and switch between large, mid and small-cap stocks depending on market conditions. HNIs may allocate 10-15% of their total mutual fund investments in flexi-cap funds to generate superior long-term returns without taking on very high risk. Flexi-cap funds help diversify the portfolio beyond just large-caps.
Sector and thematic funds
Some HNIs directly invest in sectors or themes they are bullish about by choosing dedicated mutual funds. Sectoral funds such as banking & financial services, FMCG, pharma, technology etc. allow HNIs to take focused exposure to these high potential areas. Investing 20-25% of the mutual fund portfolio through active sector or thematic funds helps HNIs maximize returns from their high conviction calls. Many HNIs also use sector and thematic funds for tactical allocation during different market conditions.
International mutual funds
HNIs seeking to access overseas markets and diversify globally have started exploring international mutual funds offered in India. While international funds are quite new in India, they provide an avenue to participate in growth happening across geographic borders. Some leading AMCs offer international funds investing in US, Asian and global markets. For risk-taking HNIs, international funds serve the purpose of diversifying 5-10% of their mutual fund portfolio beyond domestic boundaries.
Tax efficient funds
With the introduction of Long Term Capital Gains Tax post budget 2018, HNIs have started preferring tax efficient mutual fund options. Eligible mutual fund schemes such as ELSS, infrastructure and commodity funds that are exempt from long term capital gains make for prudent choices for tax planning. HNIs utilizing the additional deduction of Rs. 1.5 lakh under section 80C and the indexation benefit could lower their effective tax outgo. Hence, allocating 10-15% in suitable tax efficient funds makes financial sense.
With multiple options available across different fund houses, mutual funds allow HNIs to effectively carve out customized portfolios depending on their risk profile and return expectations. A key attraction is the daily declaration of NAV of mutual funds , providing transparency on the value of investments. The liquid, transparent nature of the Indian mutual fund industry owing to daily NAV declaration has made it a favored investment class for discerning HNIs in India. The well regulated environment further enhances the appeal by protecting investors’ interests.