By now, you must have made your financial resolution for the New Year. But wealth accumulation often takes a little bit more than just planning.
Going by the books, the right asset mix is considered the main foundation for wealth creation. So, if you are dreaming of accumulating wealth over time, you should opt for proper financial planning and go for a mix of equities and debt instruments.
Financial planners suggest eight key steps to financial planning and wealth creation in the Indian context, given the current equilibrium in the economy at the very start of Calendar Year 2017.
Equity exposure: Since the gradual opening up of the capital markets in the 1980s and big-bang moves of the early 1990s, many investors have been left out of the ambit of the equity market, which has gone on multiplying wealth over time. The domestic stock market has delivered returns that beat inflation and multiplied savings.
“Equities that our grandfathers did not understand, or were afraid of can actually generate the kind of wealth that they had never imagined. Set aside a large part of your monthly surplus for equity investment to accumulate wealth,” said Anil Rego, CEO and Founder, Right Horizons.
Equity-linked savings schemes (ELSS) of mutual funds are another investment option that is actually EEE (exempt-exempt-exempt) from income-tax perspective. Let the magic of equities purchased at a huge effective discount because of the tax saved make you rich.
Think before investing: Portfolio management schemes, lucrative stock recommendations and close-ended mutual funds look sophisticated and exotic. Sometimes an investor believes these instruments can help generate superior returns over time.
“One needs to assess the level of risk, cost and historic performance (if any) before committing to these options. Most have steep exit costs or lock-in periods. Hence, exiting these options may be expensive or not possible at all. If the investment thesis does not play out as expected, there may be no flexibility to exit and reallocate your investment. A detailed study and careful examination is a must before signing up,” said Ramesh G.
It is advisable to consult a financial adviser to help you follow a disciplined asset allocation approach in order to prevent large drawdown during market crashes.
Start saving through SIPs: SIP is more of a saving tool, than an investment. It can help inculcate the habit of regular saving by automatically deducting a predetermined amount from your bank account at a pre-set date and investing it in a mutual fund scheme. An SIP amount can be as low as Rs 1,000 a month (Rs 500 in case of ELSS funds), and even small retail investors can start investing early and benefit from the power of compounding.
“SIPs also do away with the need or effort to time the market and reduce the cost of investment by getting more units during market dips and crashes,” Kothari said.