What investment strategies can help HNIs to mitigate risk and maximise return?

Valuations in the small-cap segment of the Indian equity market are witnessing strong growth. The AUM (assets under management) of several small-cap funds have risen above Rs 20,000 to 30,000 crore, which is enormous given the size of the space and liquidity. This has raised concerns among high net-worth Individuals (HNIs). When it comes to adjusting assets, HNIs are no different in how they manage their portfolios strategically.

HNIs, due to their substantial wealth, require investment strategies that not only maximise returns but also minimise potential risks. With an adept approach and a judicious mix of investment options, HNIs can safeguard their wealth and simultaneously generate substantial returns. Let’s delve into three key strategies to usher a favourable wind for HNI investors.

To mitigate risk and maximise returns, HNIs may consider tweaking their portfolio. They can consider the following strategies accordingly:

Diversification: This involves laying out funds across various investment instruments and industries to minimise the impact of any source of risk. It also aids in minimising the overall impact of market volatility and earning resilient returns.

Mukesh Kochar, National Head of Wealth at AUM Capital, says, “HNIs may diversify their holdings across asset classes like private equity for strategic investments. A balanced combination is desirable as per the investment horizon and risk appetite. One can also invest in hedge funds, a suitable instrument to manage risks, ensure reliable returns, and diversify portfolio. Private equity investments can also ensure strategic asset allocation. Confirm that the investments in the small and mid-cap stocks align with your risk tolerance. By doing so, you can ensure that your portfolio suits your investment objectives and circumstances.”

Asset allocation: The principle of asset allocation is paramount. This refers to deciding the proportion of portfolio to invest in different asset classes, such as mutual funds, stocks, bonds, and cash equivalents, based on one’s risk tolerance, investment horizon, and financial goals. For example, HNIs with a higher risk tolerance might choose a more equity-heavy portfolio despite market volatility, while conservative HNIs might prefer a greater share in bonds guaranteeing steady, albeit lower, returns. This addresses both risk management and the achievement of financial objectives.

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Regular monitoring and rebalancing:  Dynamic rebalancing is a strategy that involves periodically reviewing and adjusting one’s portfolio according to market movements and personal financial goals. While passively following the set asset allocation in volatile markets can lead to potential losses, adjusting the portfolio in line with changing market dynamics can ward off risks and optimise returns.

“Regular monitoring and rebalancing are crucial elements of managing a portfolio. It provides discipline for any investment management strategy at both professional and retail levels. With frequent monitoring, you can oversee the portfolio’s performance and recognise areas that may need attention. Periodic rebalancing can allow HNIs to remain aligned with their goals and market conditions, aiding HNIs from being exposed to risks,” said Kochar.

Considering professional advice: HNI wealth advisors, asset management professionals, and financial advisors provide techniques and strategies to align investment choices on HNI’s goals, risk tolerance, and asset allocation requirements. These advisors also assist HNIs in reducing debt, creating sound retirement plans, and minimising taxes. While hiring a professional advisor, it is crucial to understand the expertise they hold in managing investment portfolios. The difference in return of best, average, and worst-performing schemes is huge. So, taking expert suggestions is very critical.

Kochar said, “During substantial growth in the valuation of small-cap and mid-cap funds, HNIs can book profits in these spaces. HNIs are an indispensable part of the wealth management industry. For the industry to thrive, wealth managers must have a macroeconomic view that demands thorough research, diversification, effective asset allocation, and other strategies.”