High Net Worth Individual (HNI): Example With Criteria

Financial markets around the world have different categories of players that bring different elements to the markets and, hence, are required to be identified accordingly for ease of regulation, taxation, etc. For instance, in the securities markets, there can be different categories of investors- financial institutions, individual investors, etc. Within the class of individual investors, there can be retail investors who invest relatively less in comparison to the class of high-net-worth individual (HNI) investors.

In this article, we will look at who is HNI in India, the qualifications for becoming an HNI, types of HNIs, and the benefits enjoyed by this class of investors.

Who Are High-Net-Worth Individuals Or HNIs?

High-net-worth individuals or HNIs refer to a specific class of individual players or investors in the financial services sector determined on the basis of net worth and how much they can invest in the financial markets. As the expression suggests, HNIs have a relatively larger corpus to invest in the markets and, therefore, enjoy a privileged position. In India, high-net-worth individuals are individuals that have an investable asset of over INR 5 crore.

HNIs are significant players in the Indian financial markets and are a growing segment of investors. Reports suggest that the number of HNIs in India increased by 12.2% on a year-on-year basis between 2022 and 2023, and in the same time period, Indian HNIs’ financial wealth has surged by 12.4%¹. It is also reported that the HNI population in India will grow from 7.9 lakh people in 2022 to 16.5 lakh by 2027, registering a growth of 107% in just five years².

Types Of HNIs In India

High-net-worth individuals can be further classified into three different categories depending on their net worth and the amount of money that they can invest in the financial markets. These three categories of HNIs in India are as follows:

• High-Net-Worth Individuals (HNWIs): This category of individual investors holds liquid assets of up to INR 5 crores and can accordingly invest the same in the financial markets.
• Very High-Net-Worth Individuals (VHNWIs): Individual investors with a net worth of anywhere between INR 5 crores and INR 25 crores are considered very high-net-worth individuals.
• Ultra High Net Worth Individuals (UHNWIs): Ultra high-net-worth individuals are individual investors with a net worth of over INR 25 crores.

In India, the Securities and Exchange Board of India (SEBI) has identified different categories of investors that can participate and invest in an Initial Public Offering (IPO). Non-institutional investors or NIIs is one such category of investors comprising of individual investors willing to apply for more than INR 2 lakhs worth of shares in an IPO. The category of Non-institutional investors in an IPO process includes HNIs, and has been classified as small NIIs- those investing anywhere between INR 2 lakhs and INR 10 lakhs and big NIIs- those investing more than INR 10 lakhs in an IPO. SEBI classifies anyone applying for an IPO with more than Rs. 2 lakh as a high-net-worth individual investor. Now, within this HNI category, there's another distinction. Investors bidding between Rs. 2 lakh and Rs. 10 lakh get a special treatment – they get one-third of the total HNI allocation set aside for them. Big spenders, or HNIs investing over Rs. 10 lakh, grab the remaining two-thirds of the HNI portion.

Benefits Offered To HNIs

Financial service providers, including Portfolio Management Services and financial advisors, often try to attract high-net-worth individuals to their clientele owing to their high net worth and high investable corpus. As a result, HNIs often have access to resources, information, and assets that are otherwise inaccessible to the average retail investor.

One of the major benefits enjoyed by HNIs is access to alternative investments that are otherwise unaffordable or inaccessible for the average investor. This includes traditional commercial real estate, collectables, private equity, etc. This allows HNIs to diversify their portfolio by venturing into asset classes that remain largely unaffected by fluctuations in the traditional equity and debt markets. Besides, investing in Portfolio Management Schemes (PMS), Market Linked Debentures (MLDs), and angel investing are some other lucrative investment avenues that HNIs have access to.

Owing to their financial prowess, HNIs often have access to information that is otherwise unavailable to the common investor, which helps them make crucial decisions in a timely manner.

How To Become An HNI?

Becoming a High Net Worth Individual (HNI) requires a disciplined approach to managing finances and taking calculated risks. Here are some actionable steps you can take to become an HNI:

• Develop A Strategic Financial Plan: Developing a strategic financial plan is essential to achieving your long-term financial goals. This involves setting specific financial objectives, such as retirement savings or investing in real estate, and creating a detailed plan for achieving those goals.
• Invest In Yourself: One of the best investments you can make is in yourself. This can involve improving your skills and knowledge through education or training, networking, and building a personal brand to help you stand out in your industry.
• Diversify Your Investment Portfolio: Diversification is key to reducing investment risk and achieving long-term financial success. A well-diversified portfolio should include a mix of assets, such as stocks, bonds, real estate, and alternative investments, such as private equity or hedge funds.
• Minimise Expenses: One of the easiest ways to increase your wealth is to minimise your expenses. This can involve cutting back on unnecessary purchases, negotiating better bill rates, and reducing debt.
• Seek Professional Advice: It's essential to seek professional advice from financial advisors, accountants, and lawyers to ensure you make informed decisions and maximise your financial potential. They can provide valuable insights into tax planning, estate planning, and investment strategies to help you achieve your financial goals.

Frequently Asked Questions On HNIs

1. What is the definition of High Net Worth Individual in India?

In India, High-Net-Worth Individuals or HNIs are individuals with a net worth of over INR 5 cores.

2. What are the characteristics of HNIs?

HNIs have relatively larger amounts of funds to invest in the financial markets and hence enjoy certain privileges owing to their financial prowess, including access to alternative investment classes.

3. What are some common investment strategies for HNIs?

Financial service providers, including PMS providers, often advise HNIs on their investment decisions, helping them better manoeuvre in the traditionally volatile markets. HNIs form a significant category of investors in the IPO processes. Besides, HNIs have access to alternative asset classes, such as commercial real estate, that have a high minimum investment amount and are largely inaccessible to the average investor.

4. How do HNIs manage their wealth?

HNIs usually avail themselves of the services of wealth management firms for strategic financial advice and portfolio management services.

5. What are the key challenges faced by HNIs in wealth management?

Some of the key challenges faced by HNIs include the challenge of market risks in traditional equity and debt markets, liquidity risks stemming from illiquid alternative investments, regulatory risks involved in investing in unregulated alternatives, and concentration risks.

6. How do HNIs diversify their investment portfolios?

HNIs diversify their portfolio by investing in alternative asset classes that are largely unaffected by volatility in the traditional equity and debt markets. This includes commercial real estate, private equity, peer-to-peer lending, investing in collectables, etc.

7. What are the tax implications for HNIs?

The tax implication for HNIs is higher than that for average retail investors and includes paying surcharges. The Union Budget 2023 reduced the maximum surcharge rate from 37% to 25% for taxpayers opting for the new tax regime. This amendment has resulted in significant tax savings for HNIs. The said amendments are applicable from financial year 2023-24 onwards.

References:

1. The Economic Times <https://economictimes.indiatimes.com/markets/stocks/news/indian-hnis-swell-by-12-2-yoy-in-2023-wealth-surges-12-4-on-booming-markets-economy-report/articleshow/110768234.cms?from=mdr>
2. Mint <https://www.livemint.com/news/india/india-to-have-16-lakh-hnis-by-2027-knight-frank-report-11684332782881.html#google_vignette>

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