Dear Qualified Financial Advisor,
I grew up in a middle-class family, where we always had enough to meet our basic needs and were taught not to aspire to things beyond our means. This early lesson has served me well — I don’t spend on luxuries, I’m disciplined with my expenses and savings, and I have insurance and funds for emergencies. But I haven’t quite got the hang of investing yet — I don’t see why it is necessary to grow my wealth when I’m satisfied with what I have. Do I need to change my mindset?
A Contented Non-Investor
Dear Contented Non-Investor,
The simple answer to your question is — yes! Creating wealth is essential in today’s world — to beat the roaring inflation, to fulfil our financial responsibilities and aspirations, and to support our growing lifestyle expenses — to say the least. You will be able to live a comfortable life only if you have enough wealth until the very end. For instance, if you’ve never planned for the future, don’t have a retirement corpus and have made some ad-hoc investments, how will you have enough money to take care of yourself and your family after retirement?
It’s not just you though — many people don’t work towards creating wealth with a proper plan, and don’t realise that wealth creation is a systematic process and not a one-time or ad-hoc activity. The main purpose of wealth creation is to have enough money to fulfil your financial goals without any stress, and to make sure that your money lives longer than you, especially if you have a family that’s dependent on you. Investing with a proper plan then becomes a very important factor in this process.
The process starts with budgeting by considering your family’s average monthly expenses. Then, you should invest surplus money regularly. If your income is regular, this will mean that you invest every month; if it is irregular, you should invest periodically, depending on the frequency of your income.
Making planned investments is the only way to create wealth. But many people end up making ad-hoc investments because of the sheer variety of investment products, mis-selling by unqualified advisors, lack of subject knowledge or time and so on. Investing without having a proper plan is like travelling without knowing the destination.
A good way to start is with mutual funds, which give you the flexibility to invest as per your convenience but also allow you to invest in debt (which is a relatively safe investment, in terms of the returns per unit of risk), shares, real estate, metals, the international financial market, etc. — all in one place depending on the type of mutual fund. Each type of fund has its own investment strategy and risk profile, so it’s important to understand the fund’s investment objective and fees before investing. This helps with creating a well-diversified investment portfolio. Apart from choosing the right investment options, starting your investments early in life and continuing to invest for a long period are very important for wealth creation. As time passes, your wealth compounds.
The power of compounding helps wealth grow substantially. Consider this example: A, B and C are 25 years old. All three decide to invest ₹5,000 per month systematically in a diversified investment portfolio till they turn 60 and retire. A started investing immediately. B started at the age of 35 but invested ₹10,000 per month. C started investing at the age of 45 but invested ₹20,000 per month. Assuming that all of them receive 12% annual returns from the portfolio, the value of A, B and C’s investments at age 60 would be roughly ₹2.75 crore, ₹1.70 crore and ₹95 lakh, respectively. A invested less but created more wealth because A started early and kept investing over a long period.
If you increase your investment amount as your income increases, you may see exponential growth in your final corpus. Continuing the example, if A had increased his monthly investment by 5% or 10% every year, the value of the investment at age 60 would have been around ₹4.98 crore or ₹8.88 crore, respectively.
In the process of wealth creation, you have to give your investments enough time to grow, so they can safeguard you when you need them the most. To sum it up, remember that this is a continuous process that you must plan for. This will involve asset allocation and diversification; selecting investment products based on your risk appetite, needs, time horizon, etc.; reviewing and rebalancing your plan periodically; having an adequate contingency fund and sufficient life, medical and general insurance coverage. It’s important to remember that you don’t have to do this alone — it’s okay to seek help from a knowledgeable and unbiased financial advisor who can guide you with all of these steps.