Where Do Millionaires Invest? Axis Bank's Satheesh Krishnamurthy On Wealthy NRIs Investing In India
The NRIs are also interested in taking leverage positions against deposits and bonds they have already invested in.
The wealthy non-resident Indians are looking at a variety of asset classes in India including equities, leveraging bonds, and real estate, according to Axis Bank's Satheesh Krishnamurthy.
"Good investment is something that they [NRIs] really like and if you look at the returns of the Indian equity markets over the last four or five years, it's been clearly the top quartile, even if you compare with other markets globally," Krishnamurthy, executive vice president and head-private, premium banking and third-party products at Axis Bank Ltd., told BQ Prime’s Niraj Shah in the special series 'Where Do Millionaires Invest?'.
NRIs are also interested in taking leveraged positions against deposits and bonds that they have already invested, he said.
"If they put $100 in a bond, what percentage of that can be leveraged further is something they are always very inquisitive about,” Krishnamurthy said. "And as you leverage more times, and if you do it intelligently, it increases your alpha," he said, adding but it also carries the downside risk of "severe capital erosion" if the leverage turns negative.
Real estate, is the other asset classes that interests NRIs especially commercial real estate investments in India and real estate investment trusts.
Krishnamurthy underscored that as India's gross domestic product continues to grow, more commercial establishments are being set up whose rental flows "tend to be predictable."
"Rental receipts are very clear over a 10-year timeframe. They would like to be part of that wealth creation opportunity as well," he said.
Interest of NRIs have expanded to global assets. They are looking to create a corpus outside India that would also help in diversifying the currency risk, Krishnamurthy said.
"A lot of them are also interested in owning global assets, whether it is Nasdaq listed stocks and there are funds of funds again, which offer similar products to tap into that opportunity," he said.
Some NRIs, according to Krishnamurthy, are interested in investing in real estate outside India, for the purpose of self-use or even for gains from value appreciation.
"So, as Indians find and build businesses which are present globally. They want to have assets in those markets as well," he said.
Watch the full conversation here:
Edited excerpts from the interview:
What do you think about this business considering that you have done the same at Citibank and now for the last seven-eight years at Axis? What is the secret of the rich? What is your secret to advise these rich people?
S Krishnamurthy: It's a great question, because all of us deep down are working very hard to become richer and richer everyday. I have found the DNA, the root of getting rich is to be extremely proficient at what you do. It's needless to mention, but what sets them apart is their ability to manage their own money. How do they manage their money that it is growing continuously? For that, bankers like us help them navigate. The science behind this entire pursuit of making money begins with getting your goal settings right.
Am I being too greedy? Am I being too conservative? In other words, am I being overly aggressive or am I being too conservative?
Now, these are very important questions that need to be dwelled upon, especially with the richest. It was Warren Buffett who said that you don't have to become rich twice. So, once you become rich, I think it's very important to consolidate your position.
The secret sauce, so to speak, is to get your asset allocation right. It is very, very important because the amount of capital that you deploy to the six hitting winners becomes very important. If you end up allotting very little to your multi bagging ideas, chances are that you will get very suboptimal returns. So, that is very important, whatever the goal. It's very important to get your priorities right in terms of asset allocation. Once you get the asset allocation right, you then need to choose the right manufacturer who has expertise to manage that asset. So, the entire mutual fund industry, the asset management industry comes into play.
We work with over 20 top asset management companies in India, and we help customers choose the right products from those asset classes. So, that's how the journey gets navigated. The other important elements is the time horizon for which the asset needs to be deployed. What is the target return needs to be understood. The tax treatment also needs to be understood so that there is no mismatch between your need for money at the end of a particular period and the corpus getting locked for a longer tenure.
So, you can't have an asset liability mismatch in your own personal balance sheet.
How big is this market and how big is it slated to become considering the number of millionaires will only expand with time? How different are you at Axis from the rest?
S Krishnamurthy: The size of the market is always the starting point of any business plan. I would say from multiple estimates that we have made, it's easily upwards of half a million Indian family households, who would qualify as dollar millionaires.
If you were to compare ourselves in the dollar millionaire list of countries, some countries are way ahead of us. U.S. is of course the granddaddy; China is very quickly bridging the gap followed by Japan, Germany, the UK, and then India.
In our journey from a $3 trillion economy to $5 trillion to $10 trillion, there is going to be massive wealth creation. Entrepreneurship is up! The number of startups that are flying thick and fast, not withstanding the short-term aberrations, which are part of any great business. I am strongly convinced that we are on a secular bullet train to grow wealth in this country in a massive way.
How would you want to advise these set of people as they will have their own thought process and you will be talking to multiple houses? How is it that they think? How is it that you do it differently than the rest?
S Krishnamurthy: I would first begin by outlining our core value system. It's very important to get the alignment right. When I am a banker, I have clients who wants me to help him or her manage their wealth. What they are looking for is—I call the three eyes. It is what they look for in any top wealth manager.
The first is integrity. How strong is this banker walking the talk? That's what integrity is all about.
The second critical differentiator—the second eye is the intelligence. Which means that are they all very successful. So, if I am not able to add intellectual capital to that consumer, to that millionaire’s understanding, I think I would fail. So, we have a very clear and strong research backing. We leverage right from our Axis economic research, treasury and so on. We come with a whole basket of intelligent inputs.
The third is about innovation. Both in terms of the way we provide input, provide products—the best in class products.
The requirements of these dollar millionaires are almost institutional in nature. They are as good as institutions themselves. Therefore, we need to think of them as almost managing a top corporate. If I were to go with a presentation to a top corporate, what I will do? What I need to cover? So, when I meet a top HNI, we give all the attention that we believe we need to provide to make sure that whatever be the goals of that HNI, we are able to completely ensure great justice.
The other critical belief is that this is not a one-quarter, one-year, or a five-year journey. This is a lifelong relationship. I think the relationship of a wealth manager and a customer is a very sacred one. So, it's very important to understand their temperament, their behavioural anomalies, and make sure that they are not reacting sometimes to market stimuli in a way that is detrimental to their wealth creation.
We have got to be very watchful and provide the right data points to make sure that customers make the right decisions. That's how we think about this.
How are customers reacting? What are some of your top clients currently doing with their monies? Are the investing patterns of 2022 materially different from what it would have been in 2020 or pre-Covid? What is your advice to them about investing their money?
S Krishnamurthy: The standout asset class very clearly over the last five years is alternative investment funds. I think, AIF, first came into life in 2012. We are in 2022, but the real growth took place over the last five years. The industry is worth over five lakh crores and the CAGR of this industry is 25% plus.
The top players in this industry, the manufacturers are growing very fast. Some of them may be clocking triple digit percentage growth. So, that's the kind of attraction AIFs are having. I will tell you why? The science says that you need to diversify. AIF also helps you take concentrated bets when you have a deep conviction. So, whether these are in the areas of venture debt, or it could be on some real estate invites. The entire plethora of structured products, we are able to provide a gamut of these products that gives higher yields.
Also, we are able to manage the risk return, the trade off is much more nuanced. If I want to take a very high risk and my expectation is annualised 25% CAGR return. There are products in the AIF space, which let you do that. There could be an investor who says that I am very bullish about the B2B turnaround in India. These are the private market, these are not publicly listed companies. So can I get into these ventures as an equity participant? How would I do that? There are AIF structures created by some of the top names in India, and we work with them and bring those products to our customers. They are very appreciative of these, with some of these clocking consistent IRRs of 18-19%.
One is guided with the right understanding before one takes this decision. That is why the minimum ticket size in regulatorily and is prescribed at one crore. It's meant for sophisticated investors—who has both the knowledge and the risk acumen.
I have heard you say that the millionaires usually doesn't necessarily go for exotic stuff? This is there, they doesn't go for exotic stuff?
S Krishnamurthy: It might sound as a paradox. Sometimes, the beauty of success isn't doing the simple things brilliantly. It is not about trying to chase some latest fad or trend. And say, Oh! can I make a gazillion dollars out of that?
Crypto, I would say is a good example. It's like a magnet to people who are trying to do so called high risk. But you have seen what's happened, the market collapsed. You heard the RBI governor talk about it. Why would somebody do such things?
Now, look at the mutual fund industry—What's the purpose of the mutual fund industry? The mutual fund industry takes money from people who have many other things to do, normal retail customers. Retail customers can go all the way up to the Richie-rich—they have passions, their time is being spent on building the businesses, which they know the best. The fund managers and the asset managers is to take the money these investors want to deploy in mutual funds and give IRRs as per the buckets in which they operate. So, the growth of the mutual fund industry is driven by the dollar millionaires. The industry is moving easily at 15% plus CAGR. It is marching beyond 36 lakh crore and not long ago it was at 25 lakh crore mark.
Look at the US, the MFs penetration is 120%. This means an average individual holds 1.2 mutual fund schemes. Here you are talking of 13% in India. So, the opportunity is 5x, if not 10x right now. Therefore, you will see a lot of rich folks choose their plans. Whatever be the plan they choose, It's very clear that conventional instruments are here to stay. If you look at the pie chart of all the wealth that's there amongst Indians, it is obvious dollar millionaires are a subset.
These Richie rich hold 50% in real estate,15% is in Gold, 15% will be in fixed deposits. So, 80% of the portfolio is in conventional investments. So, you can talk to any Richie rich, he would have X number of properties, Y number of fixed deposits and so on. Once the foundation has be laid, they want to get into creation of incremental Alpha, like the ones that we just discussed a short while ago. So, it's important to find that balance.
What according to you is the ideal asset allocation right now?
S Krishnamurthy: I would say the ideal allocation firstly has to come from that unique we spoke about—there is no fit all or one size fit all here.
We find customers in the million-dollars-plus financial assets hold roughly two-thirds of their portfolio in debt. I mean, fixed income. A portion of it also tends to be in fixed deposits, but it's fixed income. So, two-third would be typically in debt and the rest would be a mix of equity and some structure.
An asset allocation on an average basis will be nuanced depending on the size, but this again is a hugely divergent pool. There could be a customer with a $2 million corpus, and there is somebody with a $200 million corpus. They behave like chalk and cheese.
How are the super wealthy NRIs thinking about investing in India?
S Krishnamurthy: The NRIs are a very important part of India's wealth creation story. The one thing, we have stumped/ trumped over other nation is the $83 billion of inward remittance last year.
The top NRIs look at many products. Their interest in Indian equities is very strong. Good investment is something that they really like. If you look at the returns of the Indian equity markets, over the last four to five years, it's been clearly the top quartile even compared with other markets globally.
Then they are very interested in taking leverage positions. So, if I book Rs 100 in a deposit, can I get a leverage against that deposit and look to invest in other higher alpha creating opportunities? So, bonds leverage. So, if they put $100 in a bond, what percentage of that can be leveraged further, is something that they are always very inquisitive about. If you leverage intelligently, it increases your alpha. But if you play the leverage game, negatively, it can lead to severe capital erosion. That is where the astute thinking, right product choice becomes very important.
The other asset class that continues to be of great interest to analyse is real estate, commercial real estate investments in India and REITs. These are of increasing interest to them. They realised that as India climbs the ladder of GDP growth, more commercial establishments are getting set up. Imagine top global MNCs setting up the global transformation offices in India. The rental flows will be very predictable. So, rental receipts are very clear over a 10-year timeframe. They would like to be part of that wealth creation opportunity.
The other aspect, which is offshore investing—one is NRIs bringing money in and the other is Indians moving money outside. A common answer from all the guests who have been on the show before you is that the offshore investment appetite has really gone up. What's been your experience?
S Krishnamurthy: I think the total corpus through outgoing remittances that goes out of India is something like $20 billion, right across all avenues. Now, If you were to look at it from a diversification strategy, to take money out of India under the LRS route at $50,000 per person. Combine that with a family of four, it can be around $200 million.
So, people want to create a corpus. It's good money management principle of diversifying from a currency risk standpoint.
Second, a lot of them are interested in owning global assets. Whether it is Nasdaq listed stocks or funds of funds, which offer similar products. Then, there are also folks who want to invest in overseas real estate, let's say, in London. They want to buy an apartment. So, that would translate into outward remittance in nature. There is definitely a clear trend in terms of both sides.
So as Indians find and build businesses which are present globally they want to have assets in those markets. So, it helps build good titrate between those countries and us.
We are finding both the inward remittance and the outward remittance growing pretty healthily. I reckon the trend will continue. It's a good sign of a robust economy. Which means there is good money flow happening on both sides.
What is the framework to manage money? Can you tell me about the right thinker, manufacturers and fund managers to explain that framework so that it leaves people with the thought?
S Krishnamurthy: If any top millionaire sits down and says that I want to manage my money systematically. At its heart of success is the process. We strongly believe for consistent over-delivery on your goals, you need to follow a process that gets the asset allocation right. Once you get the asset allocation right, you have got a very high chance of delivering or over-delivering on your goals.
Immediately after getting your asset allocation right, you also got to get your time horizon and taxation understanding very clear. Then you got to make the right choice about the manufacturer. Who's got the best track record, who's delivered consistent results and which fund manager from the manufacturers reflects the core philosophy of the customer. That's where distribution houses like Axis play a part in making sure that we get the choice correct.
Helping customers make the right choice to fuel greater and greater wealth creation, by helping them choose the right asset classes. So that's how this template of success of wealth creation gets built.