Who are High Net worth Individuals?

Who is an High Net Worth Individual (HNI)?

A high net-worth individual (HNI) is defined as an investor within the Indian stock market whose individual net worth exceeds Rs. 5 crore. Typically, these individuals consist of business owners, corporate executives, and entrepreneurs.

The Securities and Exchange Board of India (SEBI) considers anyone investing more than Rs. 2 lakh in a public IPO as an HNI. Additionally, there are distinctions within this category: investors bidding between Rs. 2 lakh and Rs. 10 lakhs have a one-third reservation of the HNI portion, while those investing above Rs. 10 lakhs have a two-thirds reservation.

Private wealth managers often prioritize working with HNIs due to the intricacies involved in wealth management. HNIs require personalized services for estate planning, tax planning, and other financial matters. It's worth noting that the specific threshold for high net-worth individuals varies among countries and financial institutions.

What are the Different Types of High Net Worth Individuals?

Based on Total Net Worth -

High net worth individuals can be classified into three different categories. These categories have been defined on the basis of their overall net worth. Given below are the three categories -

• High Net Worth Individuals (HNWIs): These are individual investors who hold liquid assets of up to Rs. 5 crore.
• Very High Net Worth Individuals (VHNWIs): These individuals have a net worth ranging from Rs. 5 crore to Rs. 25 crore and are considered very high net worth individuals.
• Ultra High Net Worth Individuals (UHNWIs): These investors possess a net worth exceeding Rs. 25 crores and, therefore, are considered ultra-high net worth individuals.

Based on Willingness to Invest -

NIIs are further classified into small NII and big NII for the purpose of IPO -

• Small NII: High net worth individual investors willing to invest between Rs. 2 lakh and Rs. 10 lakh are classified under this category.
• Big NII: Individual investors investing more than Rs. 10 lakh fall under the category of big NIIs.

Where can HNIs Invest in India?

Nowadays, there are various investment options available for HNI investors in India. Here is a list of some of the best investment options for the HNIs looking to invest their pool of money in India -

• Alternative Investments: Alternative investments have gained traction among HNIs in India for several reasons. Opting for alternatives like private equity, fractional real estate, and P2P lending allows HNIs to diversify their portfolios with assets that are not affected much by more volatile options such as stocks and bonds.
  These investments also offer the potential for attractive returns. These funds are managed by skilled fund managers well-versed in HNIs' financial requirements. If you are an HNI and are looking for alternative investment options in India, it is advisable to consult a tax expert.
• Portfolio Management Scheme (PMS): PMS is a great investment option for HNIs with a minimum investment requirement of Rs. 50 lakh. Offering flexibility, PMS schemes enable investors to tailor their portfolios to suit their needs.
  Investors can make focused investments and hire fund managers to assist them invest in a strategic manner. However, it is important to note that these funds are associated with higher risks.
• Market Linked Debentures (MLDs): MLDs typically track benchmark indices such as gold, equity, and government security yields. By investing in MLDs, investors gain exposure to various market segments while mitigating the risk of direct exposure. This investment option is ideal when the market is volatile or the investors expect it to be volatile in the near future.
• Real Estate Funds/Commercial Real Estate: Many HNIs diversify their portfolios by investing in the real estate sector. HNIs also have the option to explore opportunities in Real Estate Investment Trusts (REITs) to access multiple projects or in commercial real estate through alternative funds.
  Commercial real estate, including office spaces, warehouses, and shopping centers, can offer higher returns compared to residential properties. Additionally, HNIs can also invest in serviced apartments or co-living spaces.
• Angel Investing/Unlisted Equity: HNIs may consider venturing into angel investing, which involves investing in start-up companies. Diversifying investments across 8-10 start-ups can help manage the associated high risks effectively. Moreover, HNIs can provide valuable support to entrepreneurs by offering insights and networking opportunities.

What are Some Challenges Faced by HNIs?

Despite the fact that there are various attractive investment options available for the taxpayers, they face various challenges while investing in India. Given below is the list of the challenges faced by HNIs -

• Market Risk - Investments made in market-linked investment options are highly sensitive to volatility and price movements. The investment options like hedge funds and structured investments face a high risk of loss.
• Liquidity Risk - If the HNIs need to withdraw their funds immediately, alternative investment options, such as real estate and private equity, pose challenges. In other words, these investment options make it difficult for HNIs to maintain liquidity.
• Regulatory Risk - High net worth individuals generally invest in unregulated products. This increases their exposure to fraud, mismanagement, and unethical practices.
• Operational Risk - Rather than diversifying their portfolio by investing in different assets, HNIs usually prefer investing in a single asset. This increases their exposure to risk from unexpected events.
• Concentration Risk - HNIs are highly prone to operational risks such as fraud or theft and therefore, leads to significant financial losses for individual investors.
• Complexity - The complexities associated with the various investment options available to HNIs. It poses difficulty while measuring risks and potential returns accordingly.
• Taxation - With investment and income comes taxation. HNIs face a lot of complexities and challenges with respect to capital gains, gift taxes, and property taxes. The best way to overcome these challenges and minimize taxes is to consult a tax expert.

Now that you know about high net worth individuals, their types, challenges, and the investment options available to them, it must be easier for you to choose the best investment options as per your needs. If you are an HNI who needs help selecting the right investment option, you can consult our online CAs who will guide you with the best choice.

ITR Filing for High net Worth Individuals

HNIs are required to report all their assets and liabilities in the ITR at the time of filing it and are mandatorily required to file it. The base rate of taxation for HNIs is 30%. Over and above this, HNIs also have to pay a surcharge depending on the overall income.

However, there are several ways to save taxes for high net worth individuals. For example, HNIs can create LLPs with their family members to save taxes as the distribution of profits is exempt from tax under the LLP structure.

If you are an HNI looking for more tax-saving methods for high net worth individuals, you can reach out to our tax experts to get smart, tailored strategies to save taxes. Hire an Online CA Now!