Where Do Millionaires Invest? Waterfield Advisors On How The Wealthy Minimise Risks

Divide your portfolio into multiple risk pools and stick to your asset allocation, says Waterfield Advisors' Soumya Rajan.
A coin is dropped into a piggy bank in this arranged photograph taken with a tilt-shift lens to illustrate the theme of risk in Oradell, New Jersey, U.S. (Photographer: Ron Antonelli/Bloomberg)
A coin is dropped into a piggy bank in this arranged photograph taken with a tilt-shift lens to illustrate the theme of risk in Oradell, New Jersey, U.S. (Photographer: Ron Antonelli/Bloomberg)
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How do India's ultra-rich stay rich? By allocating their investments in separate pools that have varying degrees of risk, according to Waterfield Advisors' Soumya Rajan.

The firm pioneers risk allocation by dividing wealth in broad buckets, said Rajan, founder and chief executive officer of Waterfield Advisors, which oversees investments of more than $4.3 billion and offers wealth management services to family offices and high net-worth individuals.

First, funds for liquid needs are kept aside. This could be for any purpose like buying a home, for starting a business or day-to-day expenses. This will be separated from the core investment portfolio, Rajan told BQ Prime.

The core investment portfolio is further divided into three risk pools—the conservative pool, the growth pool and the market pool.

"Conservative pool is for events like the Lehman Brothers crisis, or what we went through in Covid-19," Rajan said. "That's the portfolio that we never want risked in any way."

"So, you are really careful in terms of having very little credit risk, making sure that the principal is largely protected. The choice of products is around fixed income products like fixed deposits or tax-free bonds. That will invariably comprise about 10-15% of the client's portfolio," she said.

On the other end is the very illiquid capital that is the growth pool. "This is all in private equity, venture capital, and alternate investments. These are for the long term, around 7-10 years, illiquid in nature, giving returns of anywhere between 18-20% post tax and fees. That, again is 10-15% of the portfolio."

What's left is the market pool where the real asset allocation stance is visible. This part of the portfolio is biased towards equities, and almost 70% of the pool could be in equities, Rajan said. Another 15% could be sitting in equity in the fixed income space. A smaller portion is taken out from the entire pie to invest in commodities, she said.

"So, if you were to dissect that in terms of asset allocation, by and large, it will come to around 50% in listed markets, 30% in fixed income, another 15% sitting in alternates, and about 5% which is just sitting in commodities or real estate."

Stick To Your Guns

According to Rajan, investors need to have the discipline to stick to these strategic allocations.

"If they are making money on equities, and the equity allocation has gone up and has crossed their strategic asset allocation, then they will book profits. Likewise, if they are underweight, they will add to the market because they know that ultimately, it's about riding through the volatility, riding through the cycles when you are actually investing," she said.

Another factor they keenly consider is inflation. "It's important that your investments are actually meeting and exceeding inflation because otherwise the purchasing power, your money is not growing."

Watch the full conversation here:

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