In terms of those who hold wealth and those who create wealth, an interesting metamorphosis is currently underway.
- First, wealth is changing hands as it gets transferred from the older generation to the new generation.
- Second, sources of wealth creation are changing as new-age tech entrepreneurs and even corporate personnel, armed with employee stock options (ESOPs), have created wealth.
- Thirdly, an increasing number of people from diverse backgrounds and with varying perspectives about wealth, join the ranks of the wealthy.
It is important to note that because of all these changes, the ability to take risks by wealthy and sophisticated investors has gone up significantly in the recent past.
Correspondingly, the investment landscape has also undergone some modifications and inclusions. Traditional investment avenues which do not generate positive real returns are being replaced with innovative solutions, which are to the further right of the risk-return spectrum. In the backdrop of such an environment, ultra high net worth (UHNW) investors are looking for new avenues to both preserve as well as grow their wealth.
Here are five emerging avenues that such investors can consider include:
Equity-linked Market Linked Debentures (MLDs) and Non-convertible Debentures (NCDs)
MLDs are usually issued by non-banking finance companies (NBFCs) and offer returns that are linked to specified equity indices based on an underlying condition. For example, a 30-month MLD would pay the investor a predefined internal rate of return at the end of the tenure if Nifty 50 Index does not fall by more than 75%.
Proceeds from MLDs have a tax advantage compared with regular debt instruments but also have issuer risk as repayment of principal and defined IRR is at the end of the tenure. On the other hand, lower rated NCDs are debt products that offer higher interest rates than common debt instruments with the option of having regular coupon payments. These avenues are high in terms of risk and return as opposed to conventional debt instruments.
Additionally, both these products are rated by credit rating agencies and hence, can give investors a clear idea of the amount of risk involved. It must be noted that the options in the secondary debt market have increased significantly and while a lot of money goes into direct secondary debt portfolios made up of a mix of highly rated secondary bonds or deposits a small portion is also being used to increase portfolio returns through calculated decisions of investing in higher risk fintech companies that are backed by strong investors.
While equity participation in early and growth stage unlisted companies is known to all, one more avenue is venture debt which refers to providing short-term loans (18 to 24 …….