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Why HNIs are investing more in offshore and alternative assets

Attractive returns, transparent investment policies, tax breaks and arbitrage gains on repatriation are some of the reasons that make offshore investments hot

May 09, 2021 / 04:00 PM IST

Equity markets continue to remain choppy and the yield to maturity (YTM) on debt instruments are unable to keep up with inflation levels (CPI), pegged at 5.52 percent as of March 2021. It is no surprise that many affluent investors are seeking customised investment solutions where they can make ‘relatively’ stable and stress-free returns. Cue: alternative asset classes.

The umbrella term ‘alternative assets’ includes everything from professionally managed hedge funds and private equity to speculative options such as art, collectibles, jewellery or even fine wine.

The options we will be exploring are on the structured end of the spectrum. Such alternative assets could be privately or publicly held, offer some sort of diversification from traditional options, have a clear investment mandate and manage volatility well.

REITs and InvITs

Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are turning out to be lucrative alternatives to debt instruments. These trusts operate in a manner that is similar to how mutual funds run. However, the underlying asset for REITs is real estate instead of stocks or bonds, and infrastructure projects such as roadways, highways, power transmission lines and gas pipelines for InvITs.

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Instead of taking exposure to a single asset, REITs allow investors to gain fractional ownership in a bouquet of high-quality rent yielding properties, while InvITs give access to long-term, income generating public utility assets.

The cash flow generated from the investments via leasing/ operational income and interest income is distributed as dividend to investors. While the initial yields range between 6 percent and 8 percent, as rental income and occupancy increase, the prospects can go up to anywhere between 11 percent and 14 percent.

Also read: Why have mutual funds increased exposure to REITs and InvITs?

Alternative Investment Funds (AIFs)

AIFs are privately pooled investment vehicles that do not come under the purview of SEBI’s regulations. However, they do need a certification to operate as one. Depending on the investment mandate, AIFs can operate under three broad categories – I, II and III.

Category I: Venture Capital funds, SMEs or infrastructure funds, social venture funds (ESG), etc.

Category II: PE Funds, REITs, debt funds or fund of funds.

Category III: Hedge funds or open ended funds that use complex trading strategies.

Category I and II funds have a minimum lock-in of three years, while Category III funds are open-ended, and the taxation rules also differ from one category to another.

AIFs present the opportunity to diversify in non-traditional asset classes or pursue a specific investment strategy. However, the minimum investment threshold of Rs 1 crore per investor makes it a pretty exclusive club to get into. As of date, there are over 500 AIFs registered with SEBI, each with a different investment theme and strategy, with annual returns for some funds being as high as 30 percent.

Offshore investments

The increase in limit for outward remittance to $250,000 (in a financial year) under the Liberalised Remittance Scheme (LRS) gives investors the opportunity to create a diversified international portfolio and hedge domestic volatility with ‘uncorrelated’ asset classes. They explore everything from direct equity, mutual funds and ETFs to immovable property.

Investments in publicly listed options are possible through various avenues like multi-stock market FinTech platforms and feeder funds of Indian AMCs. Many affluent families also consider an opportunity to set up base in another country as some real estate businesses and even countries offer lucrative investment choices bundled with residency or citizenship. Additionally, this is a viable option for those wanting to send their children to universities abroad.

Attractive returns, transparent investment policies, tax breaks and arbitrage gains on repatriation are some of the reasons that make offshore investments hot.

Also read: Investing lessons from crorepatis: Know what to follow and what to avoid

Be in the know

As most domestic alternative asset choices tend to be illiquid and relatively unregulated, investors need to conduct extensive due diligence and should ideally limit their exposure to 10 percent of the overall portfolio. When used strategically, alternative assets can be used as a tool to create wealth by growing capital, generating income or enhancing a portfolio’s risk-adjusted return.
Anup Bansal is Chief Investment Officer at Scripbox
first published: May 7, 2021 10:23 am

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