Where Do Millionaires Invest? Three Types Of Assets To Divide Investments
Millionaires divide their investments in three kinds of assets—safe, market-based and aspirational.
Millionaires divide their investments in three kinds of assets—safe, market and aspirational, according to dezerv.in's Sandeep Jethwani.
The safe assets are created through investment in AAA quasi sovereign instruments, which are wholly or partially owned by governments, Jethwani, the co-founder of dezerv.in, told BQ Prime’s Niraj Shah in the special series 'Where Do Millionaires Invest?'.
"The first bucket is what we call the safety part. That is a part of the money that they want to keep aside for a rainy day," he said.
The second part of the portfolio includes market assets such as equities, gold, fixed income, and liquid fixed income, among other options.
"That is the part of the portfolio that needs readjustment or rebalancing, depending on how markets move."
The remaining funds go in the "aspirational" assets category that includes private equity, venture capital, individual angel investing, high-yielding fixed income, and structured credit.
"Typically, in the first and the second (categories), you don’t see family offices, high net worth investors reacting to daily market situations, but in the third which is the opportunistic bucket definitely so to readjust," Jethwani said.
Watch the full conversation here:
Edited excerpts from the interview:
Can you tell us about dezerv.in because you guys are a new firm? What do you guys do, per se?
Sandeep Jethwani: The three co-founders including myself have been investing in wealth management for the last 17 years, typically working with the ultra-rich in the country—industrial families, entrepreneurs, all these tech entrepreneurs who have created wealth over the last many years.
For the last few years, we were feeling that there are these whole set of new smart professionals in India who are making a decent amount of money, but don't have access to the same amount of expertise that the ultra-rich have had access (to).
What does that mean for them?
It essentially means that either (A) they leave their money idle in bank accounts and therefore don't invest, or (B) sometimes they end up doing it themselves ad hoc, whenever they get a little bit of time on a Saturday or a Sunday. The net result of that is the money is not growing the way it should.
Today, we are at a point in time where our lifespans are going to be pretty long. You and I, potentially, can live up to 95 or 100 years and might run out of money. So, your money really and truly has to grow. The environment is very volatile. You do need a set of experts on your side who's working all the time, 24/7 to grow your wealth. That's the core idea of dezerv.
So, how do we deliver that expertise, which is available only to the ultra-rich in the country? Through a digital platform.
The wealth management firms have the rich of India as their clients. There is a whole set of IFAs (independent financial advisors) in the country who cater to people who might be working professionals. Are you trying to have a platform which is bridging the two?
Sandeep Jethwani: India is a strange place where the wealth growth and the growth of IFAs has not kept in sync. There are far more rich people in India, reasonably wealthy people in India, who want to invest. Professionals like you and me but (they) don't have access to the IFAs because there's just not enough of them. The U.S. has about 4,000 advisors per million households, while India has just 200 advisors per million households.
This essentially means that folks don't have access to expertise. How do we leverage tech to bring the same expertise to a wider audience? They decide when they want to access us, unlike human interface where you will need a human being to come to your office and talk to you. That doesn't need to happen anymore.
How is tech as a space? Can you throw some light on what you personally feel about it? Where in the journey are our tech businesses and tech investors?
Sandeep Jethwani: We have seen three or four cycles. This has been the sharpest shift that I have ever seen, and it's potentially linked to how sharp the up-move was in 2020-2021.
Right up to 2018-19, there was organic growth that was happening. March 2020, the world shut down and suddenly by the second half of 2020, tech adoption boomed. That was pretty much because of lack of choice. As a user, you wanted to consume a service or buy a good that you wouldn't be able to go out and buy. Therefore, you order it online or consume it online, reflecting the huge adoption of tech.
What everyone did was (they) extrapolated that to the next few years and said the pace of growth will continue to remain the same. Things were going well for tech in the last two years till the point the world started to open up. To some extent, everyone started readjusting back to the old life but not fully. It is sort of a combination between what we had earlier and during Covid time. Essentially, tech is in that phase of readjustment.
The second big thing is the capital flows. We are now seeing quantitative tightening by the U.S. Fed and other global central banks, as a result of which this surplus cash that was available for investments and ending up in tech is now becoming much lesser.
Tech businesses are valued on basis of growth and when the interest rate is very low, you get significantly premium valuations for growth. But as interest rates rise, people want to value profitability. Tech businesses are in that transition right now. Through this, in the next couple of years, strong tech businesses will emerge as we are focused on sustainability.
What's the set of clients that you have? Are the practices to get clients to invest into a portfolio materially different from what you may have been doing in your earlier avatar of handling ultra HNI clients? What you have in reserve?
Sandeep Jethwani: Absolutely! The majority of our clients who deal with us today are people who are working professionals, who have a full-day job, potentially a family. So typically, most folks are in the range of 30 to 45-50 years of age. That is the point in life when the kind of money that you have is large enough for you to seek expertise. When you are 25-30 years, you want to experiment with your own decision-making but when the stakes become larger, you need somebody to help you with it as you also don't have time. So, that's typically our client base.
So, currently, majority of them live in tier one cities and are reasonably well-educated. Therefore, they understand the need for investing. Today, we are in a fortunate position that we don't have to convince them (on) the need to invest their money. We have moved to the stage of how we can help them with their money. So, that is one part.
As far as how do we help them differently, relative to what we would have done for HNIs a few years ago, there is one common thread which is the core approach to managing money.
There is a sort of central portfolio which we have, which is our long-term portfolio, and then we make opportunistic bets depending on what the market environment is indicating to us at that point in time.
That core concept is consistent with us. So, in that sense, there is no difference between what we do now versus what we were doing for HNIs.
The only difference is HNIs have access to some asset classes because of the minimum entry ticket points being higher. Our job there again was to figure out how we can slice down that into smaller ticket sizes. So that's the essential effort. The core concept.
The discipline of managing money remains constant. In fact, majority of the investing team is coming from places where they have managed large pools of capital for either HNIs or institutions. So, in that sense, the discipline remains constant.
Where has majority of your clientele invested? Where are the informed investors investing? What's your experience about the clientele's view on what to do with their money currently or over the last few months? What has been your advice to them?
Sandeep Jethwani: The informed investors or people who have been investing for a long time understand the need for a core portfolio. Which is that part of their money that may not necessarily react to the markets on a daily basis. This portfolio will have multi-asset portion, including fixed income, equities, international equities, gold and all of that in one sort of basket. This doesn't change from a strategy perspective.
So, if my strategy is that I will be aggressive, then I will have a larger equity allocation. All that is needed to be done consistently is to ensure that we rebalance periodically within the equity allocation of our position correctly, given the current setup of markets.
So, that is the core part of the portfolio where we react to market, and it is called the opportunistic part.
For example: We are seeing a lot of opportunity in high yielding, fixed interest rates. There are instruments like bonds and market-linked debentures, which are offering 9.50% to even 10%. That is where capital is going because the informed investors believe this is a great time to lock-in the yields for the next few years and potentially benefit from the higher rate of return, which they have not seen in the last few years.
So, I am seeing a lot more allocation in the fixed income, in the opportunistic part of the bucket. In the core part of the portfolio, that same disciplined approach is what informed investors are taking and that is what our advice is to them, as well.
All the respondents in the previous three shows on the series have said they believe that for the next three years, fixed income could actually even outperform equities. What's your sense?
Sandeep Jethwani: It's hard to generalise in that sense. Portfolios get created around three buckets.
The first bucket is what we call the safety part. That is a part of the money that they want to keep aside. Imagine you had Rs 100 crore and you would say that Rs 15 crore, I will keep aside for a rainy day. I don't want to risk that, and that typically goes into AAA quasi sovereign instruments.
The second part of the portfolio is a more market assets portfolio. It means equities, gold, fixed income, liquid fixed income, etc. That is the part of the portfolio that needs readjustment or rebalancing, depending on how markets move. This is to go back to the discipline that you have set for yourself.
The third part of the portfolio is what we call aspirational assets. These are more private equity, venture capital, individual angel investing, high yielding fixed income, structured credit, etc.
Typically, in the first and the second, you don’t see family offices, high net worth investors reacting to daily market situations. But, in the third which is the opportunistic bucket, definitely so to readjust.
For example, we have seen a huge burst of angel investing activity happened in a category and surprisingly, it is continuing to happen. The HNI community is not reacting to the market in the way that they would have done before.
They are probably becoming a little smarter about the fact that this is potentially time to get well-priced opportunities which they might have missed last time.
Having said that, fixed income is definitely a big play. We are seeing structured credit takeoff. We are seeing high yielding bonds takeoff. So, that's exciting too.
Can you talk a bit about newer opportunities that may have come up, that is something that was probably not very commonplace five years ago and has now become more frequent?
Sandeep Jethwani: Courtesy of Shark Tank, there's been a lot of interest around investing in startups. Startup investing is all legitimised. People are actually seeking out opportunities to invest in startups.
There is, however, one problem. Which is what I call adverse selection. What ends up with HNIs and with sort of common folks like you and me are those that have been rejected by multiple layers of investors. So, if I were a founder raising capital, I would first go to the top-tier VCs, then to second-tier micro-VCs and so on. If I am not able to raise capital, I will end up with individual investors, and that is the adverse selection issue.
We are trying to solve this issue. How do we get folks, HNIs or even common working professionals to invest alongside the top tier funds, and it includes leveraging our relationships with the ecosystem. But having said that, in general, there is a lot of interest in startup investing, backing early-stage companies. I think that's very healthy long term, for India.
How are you doing it?
Sandeep Jethwani: We have a lot of relationships through our cap table. We have some of the longest tenured VCs invested in reserve. We work very closely alongside them. Secondly, we have a bunch of over 26 founders who are angels in reserve. They are active investors themselves. So, in a sense, this ecosystem ensures that we get access to the deals.
Will there be limit ticket size issue returns or are they accepting pooled money?
Sandeep Jethwani: There are ways of doing this. We are also accredited as a category one angel fund, which allows low ticket sizes into individual transactions. We leverage that capability that we have, along with the access coming from the venture capital ecosystem.
Like the ultra HNIs, are the working professionals with slightly higher risk appetite also feeling the need to invest or diversify in international assets—equity or otherwise? What is your experience?
Sandeep Jethwani: It's still early in the day from an LRS (liberalised remittance scheme) perspective. Majority of the LRS remittances from India go towards education and travel. There is not enough happening from common folks around investing.
Definitely, people are interested in investing overseas. Some of the recent curbs that happened on the global feeder fund from India actually are potentially going to encourage more or less activity to happen in the future.
Having said that, there is obviously the whole process that still needs to be streamlined. The remittance from your bank account to the global bank account, the filings that you need to do all around that, and then subsequently deciding where to invest.
We have a strong view on the kind of fund managers that we can give access to, but still we have to solve the execution process. That's a huge opportunity in India.
What do you reckon is the average portfolio allocation currently between the special assets, equities, fixed income, international, maybe gold or some other commodities? How would you do it if you are designing a portfolio for an HNI investor?
Sandeep Jethwani: I would say, 70% goes into liquid assets. By liquid assets, I mean public equities, liquid fixed income, gold, international equities, all of that is 70% of the portfolio.
The stance that you take within that depends on how much volatility that individual can tolerate. For example, if somebody says, I am okay if my portfolio is down 20%, I won’t lose sleep. Then they will have a much larger allocation to equities within that portfolio.
That's what I call the core portfolio.
Then, as the alternative portfolio, which is about 30% is typically more opportunistic. Looking at the market environment and the offering you have such as typically today's structured credit, some bit of startup investing, and focused activities like long-short funds and so on.
The general opinion is there was fanfare for startup investing. It was probably a very liquid market about until 12 months ago or six months ago. It may have ebbed off a little bit and there could be some liquidity issues currently. Are you still active there or do you reckon that it's better for people to bid some time and maybe look at it six months out?
Sandeep Jethwani: You have to be far more selective, for sure. Having said that, a lot of great entrepreneurs are starting up at a time when there is capital constraint. So, the quality of entrepreneurs are much harder, they have been tested, and therefore will be able to survive much longer.
So, from that perspective, it is an interesting opportunity.
The deal flow is much lesser than what it was earlier. So, obviously, investor interest is also less. This essentially means that you will probably get a better valuation than you would earlier.
So, it's an opportunity. Keep your eyes open. If you get a great founder, by all means, do look at it, but don't rush into it because it's the new hot thing.
Most of the wealth managers have a cap limit. So that's the number of people who might have interest to know the opinion, but can't access the wealth team. In your case, I believe the access is there. So, what kind of facilities do you provide for somebody who gets a chance to interact or be a client of yours?
Sandeep Jethwani: When folks sign up on our platform, we ask them a set of questions and then we create a sort of multi-asset portfolio for them. If they have questions, they can get on a Zoom call with our investment experts to understand why that portfolio got recommended to them and go deeper into the way we selected the instruments.
Once they are onboard onto the platform, we open up the alternatives segment to them. It's our core belief that you need to have that core portfolio going before you start doing the exciting stuff. On the alternative side, then we bring only limited ideas to the user. We are not a supermarket. We don't throw everything at the user. Only three to four ideas that we have deep conviction in and that have been researched by the team are offered.
The idea is how do we keep the ticket size down. So, we start with an amount of Rs 50,000 and even on the alternative side, the entry ticket is in the range of Rs 25,000 to Rs 50,000.
That's seriously available for almost everybody in the country to be able to get a slice of it?
Sandeep Jethwani: That is the idea. We are limited by how many people we can get onboard at a single point because we do want to give a little bit of personalised touch. Be able to talk to them if they want to.
So, that's our only limitation. But otherwise, we are very excited for the journey that we have had in the last six months.
