WealthBriefingAsia speaks to experts on the transformation of the Indian wealth and investment management landscape.
The fall of the Western economies at the height of the global financial crisis has shifted the spotlight to Asian countries, whose younger economies have let them emerge relatively unscathed.WealthBriefingAsia spoke with Ashish Khetan, executive vice president and head of family office for Kotak Wealth Management, and Prasad Koparkar, the head of industry and customised research for CRISIL Research on the death of stereotypes, transformations in the Indian wealth and investment management landscape and future trends.
WBA: UHNW individuals' growing interest in luxury items kills the stereotype commonly shown in media, where India is depicted as largely third world. Where is all this money is coming from?
AK: In less than two decades, India has transformed itself from a largely agrarian economy with a modest growth rate to being ranked amongst the world's most dynamic economies. The country's gross domestic product, which grew at an average of over 8 per cent per annum over the past three years, is estimated to have grown by 8.6 per cent in 2009-10. It has progressed way beyond such stereotypes, proven by the fact that today it is the second-fastest-growing economy in the world, after China.
The economic boom has led to an unprecedented level of wealth creation. Average income levels have risen manifold, propelling the already-rich people and a few other first-time entrepreneurs and technocrats into the UHNW club. Hardly a day goes by without the announcement of the entry of a global super luxury brand into India. A few years ago, public displays of opulence would have been unthinkable; but attitudes are changing. The trend for conspicuous consumption is unlikely to reverse. There is a general consensus that the India growth story will endure in the long run.
WBA: Where are India's wealthy located and what types of business do they engage in?
PK: In terms of geographical split, Mumbai and Delhi together account for 55 to 60 per cent of UHNWs in India. The top 10 cities in India, inclusive of Mumbai and Delhi, account for 85 to 90 per cent of the UHNWs.
One interesting aspect of the UHNW class today is heterogenity - they come from varying social backgrounds, unlike the pre-Independence scenario when they were more likely to belong to the upper classes or nobility. Today's UHNWs would typically include businesspeople who own enterprises with a turnover of Rs750 million or above, corporate executives, established professionals, traders, builders, and agricultural landowners.
Entrepreneurship is clearly the dominant source of domestic wealth, but fast-growing service industries such as technology and financial services have catapulted many hitherto middle-income group individuals into the UHNW brackets. They are a varied mix of people.
WBA: The Top of the Pyramid report which you recently published classifies India's UHNW demographic into three profiles: the inheritor, the self-made, and the professional. What are the spending and investment trends within each group and where are these trends likely to lead in the next few years?
AK: UHNWs are not a homogenous group. The inheritors are traditionally wealthy individuals who have inherited the wealth and business from their forefathers; the self-made are first generation entrepreneurs whose success in business has made them wealthy and who have the inherent desire to be recognized as "rich"; while the professionals are qualified, highly skilled people who earned wealth based on their academic and professional merit.
The inheritors and the self-made have similar spending habits and are highly evolved brand users. They are likely to be known as trendsetters. While the inheritors seek exclusivity and brand popularity, and the self-made look for novelty and customisation. Meanwhile, the professionals are more grounded with their money and do not generally lead a flashy lifestyle. They look for utility and functionality.
Our survey indicated that, while the top spends for inheritors are luxury items, the big-ticket spending is reserved for their family, like exclusive holiday packages, jewellery products, and household electronics. They also distribute investments across various asset classes, with a greater emphasis on real estate, or about 40 per cent of their portfolio, and equity, 30 per cent.
The self-made are likely to be the biggest spenders on designer merchandise, with spending on family confined to holidays abroad, jewellery, and electronics. Travel is fewer probably because they spend more time on business. They also tend to take calculated risks with their investments and, as a rule, invest only in instruments they understand fully. This is apparent in their choice of real estate assets -- they are more likely to own a mix of realty assets, such as holiday homes, commercial buildings, and agricultural land and plantations.
The professionals admitted a weakness for fancy cars and spend time on self-enrichment by pursuing their hobbies and passions. They route three-fourths of their investments into financial assets, primarily equity and debt. They are also the most inclined to pay for investment advice compared to other UHNWs. On leaving behind a legacy for children, professionals would rather have their children make their mark in life through merit.
WBA: India's wealthy are now more interested in alternative asset classes. Is the shift to non-traditional investments a sign that wealth managers have improved in terms of educating clients about their options?
PK: The primary motives for investment legacy for the family, maintining lifestyle and social status, and regular income. In business, growth is the chief objective. Alternative assets, including private equity, commodities, structured products and derivatives, are expected to gain traction as the market evolves and players gain access to a wider range of investment options. The Kotak Wealth/CRISIL report indicates that the share of investments in alternative assets is expected to rise to 11.2 per cent in 2011-12, from 9.5 per cent in 2009-10.
The survey also indicates that UHNWs use professional investment adbice for only around 50 per cent of their investment decisions. Hence, this shift to non-traditional investments is not necessarily a sign that wealth managers have improved in terms of educating clients; however, we foresee numerous, exciting opportunities for wealth managers and luxury brands in the future. The demand for professional advice will increase in the future because of wider range of investment options, increasing market complexitiy, and growing exposure to alternate assets.
WBA: How has the internet affected a rapidly rising economy?
AK: Until the 1990s, the average Indian exercised far more prudence in spending, particularly on items or services that are generally perceived to be crassly consumerist. But that is no longer the case. The average individual today is being bombarded through all forms of media by focused sellers intent on peddling a variety of goods. Because of the Internet and increased global travel, there is greater awareness of international brands. Moreover, there is greater willingness to spend because things are within reach and pockets are loaded.