Why the ultra-rich do not invest in mutual funds?
Mutual Funds are like entry level sedan cars that make you enjoy some horsepower without compromising on mileage.
Fixed income instruments such as NCDs, Fixed Deposits, Sovereign bonds etc are like small hatchback cars that give you good mileage but NO horsepower.
In the above two statements, ‘Mileage’ means ‘peace of mind’ while ‘Horsepower’ means ‘returns’.
Now, when you buy fixed income instruments, you know beforehand about the returns that you are going to get (which can’t even beat inflation). You buy mutual funds only for the long term hoping to beat fixed deposit returns by a margin (which most of the time do beat FD returns)
An ultra rich investor will not buy a small hatchback car or an entry level sedan car. He will only buy a super car that has ‘extraordinary horsepower’ without giving any importance to the ‘mileage’ because he can very easily afford the mileage.
He will put his money in private equity, venture capital, sometimes hedge fund etc. These ‘super cars’ give extraordinary horsepower but no mileage.
Let us have a look at some facts
- A Maruti Alto or a Honda City is shown every minute in a television ad. So do mutual funds as ‘mutual fund sahi hai’. Fixed deposit rates of all banks are published in economic times and financial express every Saturday.
- A Rolls Royce or a BMW or a Mercedes Benz is not shown in any TV advertisement because people who are going to buy these super cars are not watching TV. Similarly, private equity investments are not advertised on TV.
If I, as a middle class person buy a ‘super car’, I will only be able to place my hand on an ‘entry level BMW or Merc’, that too on EMI if my salary is very high or I have a second income source. I may enjoy superior horsepower, but the lack of mileage will take a toll on me.
I, as a middle class person, can’t even think of buying a Rolls Royce or a high end BMW because they are not available in EMIs. Even if I borrow money to buy a high end super car, I will have to sell it soon because I will not be able to manage the maintainance cost.
But as a super rich investor, I have 10 sources of income (what salary!! I don’t do jobs) and a net worth of more than Rupees 100 crores, I will have to shell out just 1% of my net worth to buy a high end BMW car that costs Rs 1 crore only.
Thus, a super rich investor is an informed and experienced investor to generate extraordinary returns through private equity funds and not even look at mutual funds as a choice.
He/she will easily manage the ‘maintainence costs’ associated with these investments.
SEBI & RBI also know these facts. Thus, they will not allow me to invest in private equity if my net worth is less than two million dollars or Rs 14 crores (excluding the valuation of the house I live in) or an annual income of more than Rs 1.5 crores.