High‑net‑worth investors (HNIs and UHNWIs) face a paradox: larger portfolios create more opportunity and more concentration, liquidity, and behavioural risks. The objective is simple survive every market so compounding can do its work. This guide lays out a practical, compliance‑safe framework for Indian HNIs across PMS, AIFs, mutual funds, bonds, and selective Pre‑IPO exposure.
1) Start with a Written Risk Policy
Why it matters: Decisions made in calm times protect you in volatile times.
Minimum contents of a one‑page policy:
- Investment objective stated in rupees (₹) and real terms
- Maximum drawdown tolerance (e.g., “limit peak‑to‑trough loss to 15% at the total portfolio level”)
- Liquidity rule (minimum % in T+1/T+2 instruments)
- Position and manager limits
- Rebalancing and escalation triggers
- Approved instruments and leverage policy (usually zero for HNIs)
Tip: Review annually and after any 10%+ portfolio drawdown.
2) Risk Budgeting > Return Chasing
Assign explicit risk budgets instead of chasing top‑line returns.
- Total risk budget: e.g., 10–12% annualised volatility and 15% max drawdown
- Sleeve budgets: Equity, fixed income, alternatives, cash
- Use of capital vs risk: A ₹1 crore allocation to a low‑volatility arbitrage fund may consume less risk than a ₹25 lakh micro‑cap sleeve
Tools: position‑level VaR bands, historical volatility, and stress loss estimates (see Section 7).
3) Strategic Asset Allocation with a Core‑Satellite Design
Core (60–80%)
- Equity core: broad‑based mutual funds or diversified PMS; prefer factor‑balanced exposure
- Debt core: high‑quality bonds and debt funds matched to cash‑flow needs
- Cash/treasuries: dry powder for rebalancing and obligations
Satellite (20–40%)
- Thematic/alpha: select PMS strategies
- Alternatives: AIF Category II (credit), Category III (long/short, market‑neutral), real assets
- Tactical tilts: gold, REITs/InvITs, global funds via LRS
Internal reads to deepen allocation thinking:
- Bonds: A Beginner’s Guide to Fixed‑Income Investing
- AIFs vs Mutual Funds: Portfolio Diversification
- PMS Investors in India
4) Diversification That Actually Reduces Risk
Diversify by source of risk, not by the number of line items.
- Equity styles: mix quality, value, and low‑volatility to avoid single‑factor drawdowns
- Credit: stagger maturities; prefer AAA/sovereign for core; restrict sub‑AA exposure to a small, monitored sleeve
- Alternatives: prioritise low correlation, transparent strategies; cap illiquid/private exposures
- Geography: selective global funds for currency and sector diversification within RBI/SEBI limits
Further reading:
- Risk and Reward: Why Bonds Matter in a Portfolio
- The Hidden Power of Fixed Income in a Volatile Equity Market
5) Concentration and Position Limits
Set clear caps to prevent single‑name or single‑manager blow‑ups.
- Single security (listed): ≤5% of portfolio cost; tighten to ≤3% for small‑caps
- Single unlisted/Pre‑IPO: ≤2% per issuer; aggregate Pre‑IPO sleeve ≤10% and only via diligent channels
- Single manager (PMS/AIF): ≤15% of portfolio NAV; diversify by style and process
More on Pre‑IPO risk controls:
6) Liquidity Management and Cash‑Flow Laddering
Objective: meet liabilities without forced selling.
- Maintain 12–24 months of known expenses, EMIs, and commitments in T+1/T+2 assets
- Build a bond ladder to match large, dated outflows (tuition, real estate, philanthropy)
- Cap assets with >1‑year lock‑in at a prudent slice of the portfolio; monitor capital calls for AIFs
Related read:
7) Stress Testing and Scenario Analysis
Test how the portfolio behaves in bad states of the world.
- Historical shocks: 2008, 2020, rate spikes, credit accidents
- Forward scenarios: 20% equity drawdown, 150 bps rate rise, INR depreciation, real‑estate slump
- Output to track: peak‑to‑trough loss, recovery time, and liquidity coverage ratio
Escalate to de‑risk when projected drawdown breaches your policy.
8) Tail‑Risk Hedges that HNIs Actually Use
- Gold (5–10%) as an inflation and currency hedge
- Long volatility/long‑short AIFs for crisis convexity
- Options overlays on concentrated equity sleeves via PMS/AIF Category III (discretionary and risk‑managed)
Internal analysis:
9) Credit, Counterparty, and Operational Risk Checks
- Prefer segregated portfolios and high‑quality issuers for debt funds
- Monitor credit events and downgrade cycles; avoid yield traps
- For PMS/AIF: verify custody, brokerage, valuation, and audit; insist on ISIN‑level reporting and reconciliations
- Use escrow/DP best practices for unlisted share transfers
Deep dives:
10) Behavioural Risk Controls
Wealth is often lost in the space between the screen and the chair. Codify habits.
- Pre‑commit to rebalancing bands (e.g., ±20% of target weight)
- Use cool‑off periods before large tactical moves
- Track decisions in an investment journal; audit results quarterly
Suggested read:
11) Governance for Families and Promoters
- Establish a Family Investment Committee with a quarterly cadence
- Define decision rights: who approves new managers, unlisted deals, loans against shares
- Maintain a consolidated risk report across all entities and family members
12) Tax‑Aware, Compliance‑First Implementation
- Map holding periods and likely cash flows before instrument choice
- Use growth vs IDCW options deliberately
- Document PAN/Aadhaar, KYC, POA, FEMA/RBI requirements for NRIs and overseas exposure
- Align with SEBI PMS and SEBI AIF regulations and disclosures; avoid structures offering implied guarantees
Cross‑links for structure choices:
13) Monitoring and Reporting: What to See Monthly and Quarterly
Monthly dashboard
- Total NAV and net flows
- Sleeve‑wise P&L, VaR, and factor exposures
- Liquidity coverage days and upcoming cash calls
Quarterly deep‑dive
- Attribution vs policy benchmarks
- Stress and scenario updates
- Compliance exceptions and corrective actions
14) Model Allocation Examples (Illustrative, Not Advice)
Balanced HNI (7–10 year horizon)
- 45% Indian equity (MF/PMS diversified)
- 25% Investment‑grade debt
- 10% Global equity funds
- 10% AIF Cat II/III diversified
- 7% Gold
- 3% Cash
Cash‑Flow Focused HNI
- 25% Indian equity core
- 35% Investment‑grade debt and target‑maturity funds
- 15% Credit opportunities (AIF Cat II) with oversight
- 10% REITs/InvITs
- 10% Gold
- 5% Cash
Concentration guardrails apply to each model as per Section 5.
15) A Simple 10‑Point Risk Checklist
- One‑page policy signed and dated
- Risk budgets are set and monitored
- Core‑satellite allocation defined
- Position and manager limits enforced
- Liquidity ladder ready for 12–24 months
- Stress tests run and reviewed
- Tail‑risk hedges sized and funded
- Counterparty and operational due diligence done
- Behavioural rules documented
- Quarterly governance cycle on the calendar
FAQs
1) How much cash should HNIs hold? 12–24 months of known expenses and obligations in T+1/T+2 assets is prudent to avoid forced selling.
2) Are AIFs suitable for every HNI? No. Use when the strategy clearly diversifies listed exposure or provides specialist credit/long‑short alpha. Review lock‑ins, fees, and the manager process.
3) Should I hedge equity with options? Consider professional overlays via PMS/AIF Cat III. Costs must be justified by drawdown reduction and policy limits.
4) How often should I rebalance? Use bands (e.g., ±20% of target weight) and review quarterly. Rebalance faster if risk budgets breach.
5) What is a safe level of Pre‑IPO exposure? Keep it small (often ≤10% aggregate) with strict issuer caps and exit visibility. See our notes on Pre‑IPO risks.
Conclusion
Risk is not the enemy. Unpriced risk is. HNIs who write down policies, budget risk, diversify by drivers, and enforce limits tend to preserve optionality and compound wealth through cycles.
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Disclaimer: This material is for education only. It is not investment advice or an offer to sell or solicit any security. Past performance does not guarantee future results. Investing involves risk, including possible loss of capital.
