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Investment returns seen slowing on demonetisation, global uncertainty: Karvy report

15 December, 2016

Investors should brace for a turbulent 2017 as the government’s demonetisation drive and global factors such as the shock victory of Donald Trump in the US presidential elections, the US Federal Reserve’s rate hike and Britain’s decision to leave the European Union may dampen economic growth, wealth manager Karvy said.

The demonetisation drive will take the government at least six months to replace the cash – estimated at Rs 14.6 trillion. As a result, consumption-oriented sectors such as agriculture, automobiles, fast-moving consumer goods as well as durables will face near-term headwinds, Karvy said in its India Wealth Report 2016.

Bank fixed deposits will remain the most favoured investment vehicle for the next one year, as will fixed-income instruments, considering the underperformance of equity instruments as well as the withdrawal of old high-value notes that led to a massive rise in bank deposits.

Interestingly, a new trend and allocation in Bitcoins is likely to emerge as rich Indian investors move toward a less-cash economy.

“A new trend may be that HNIs (high net-worth individuals) also try out investing and allocating some portion of their wealth in the coming years in opportunities such as Bitcoins, which although popular in many developed economies, are yet to catch up and gain acceptability in India,” said the report.

Notwithstanding the near-term headwinds, Indian individuals’ wealth is likely to record compound annual growth rate (CAGR) of 12.9% over the next five years to Rs 558 trillion as more people deploy cash in financial assets. India’s individual wealth stood at a little over Rs 304 trillion in 2015-16.

Equity markets continue to be the most preferred asset class over a long-term period for fund allocation, followed by fixed-income instruments. 

Financial assets are projected to grow at a faster pace of 14.73% CAGR, nearly doubling in the next five years, stated the Karvy report, which surveyed more than 475 rich investors in 12 Indian cities.

About 57% HNIs follow an asset allocation strategy, of which 38% HNIs review their strategy every year.

Among the different classes of respondents, 63% of HNIs chose wealth creation over capital preservation as their main motive behind investment. More than two-thirds voted in favour of equities.

This is despite the recent decline in the Indian equity markets and the subsequent drop in individuals’ wealth proportion held in equities (16% to 13%). Benchmark indices yielded negative 4-5% returns in fiscal year 2015-16, Karvy said.

Alternate assets remained the least favourite, with even the professionals shunning it. Still, 53% individuals surveyed preferred investing in private equity while 48% chose high-yielding non-convertible debentures.

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Investment returns seen slowing on demonetisation, global uncertainty: Karvy report

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