Bill Gates once famously said, “If you are born poor, it is not your mistake, but if you die poor, it is definitely your mistake.” While this statement may sound a tad bit unfair, what it implies is that becoming rich over a longer time frame is not about taking on too much risk, speculating, or hitting the proverbial pot of gold at the end of the rainbow. It is more about planning, being disciplined, and careful execution. Consider the table below:
|Started investing at||25||30||35||40|
|Invested for total of||30 years||25 years||20 years||15 years|
|Invested in||Liquid funds||Equity Funds||Balanced Funds||Sector Funds|
|Total Investment||Rs18.00 lakhs||Rs21.00 lakhs||Rs24.00||Rs23.40 lakhs|
|Final Investment Value||Rs50.48 lakhs||Rs191.00 lakhs||Rs87.37 lakhs||Rs41.45 lakhs|
|Wealth Ratio||2.81 times||9.10 times||3.64 times||1.77 times|
In the above illustration, each individual represents a unique aspect of long-term investing. Let us understand them:
- Ashok has done the right thing by starting early, but he wasted the 30-year time frame by investing all his money in liquid funds. His wealth ratio of 2.81 times says it all.
- Biren has best applied the concept of wealth creation. He has used time (25 years) in his favor and invested in equity funds. The explains the growth of 9.10 times of the investment.
- Mayank has done fairly well for himself, but with 20 years at his disposal, he could have earned additional returns through equity funds. Balanced funds were actually sub-optimal for him.
- Yatin made the mistake of investing in commodity funds when they were in the midst of a down cycle. After 15 years, his returns have only been slightly better than liquid funds despite the risk he took.
Consider these five options to retire rich and tension-free...
- If you are looking to retire rich and stress-free, equity funds should be your principal choice, especially if you do not want to go through the hassles of too much of monitoring and tracking. You will still be required to track your equity fund portfolio and make appropriate changes when the situation demands. The idea is to stick to diversified funds and not venture into sectoral or thematic funds. As illustrated above, even if you assume a conservative return of 14% on equities, you can squeeze a lot of compounding returns from these equity funds. Of course, you must stick to the good old growth plans.
- If you are looking at the long term, direct equities may also be a good choice. Yes, you would need to put in some extra effort, but it is worth the while. Consider the last five years, and you will find stocks such as Ajanta Pharma, Britannia and even heavy weights such as Reliance and Hindustan Unilever giving phenomenal returns. You need to be careful not to get trapped in the wrong sectors, but it’s not too complicated. Ensure that you focus on the management quality while analysing companies.
- Our third option is a subset of equities, but we are still treating it separately as they offer you the best bet against market cycles. Focus on low-debt companies. For example, companies with high levels of debt are always more vulnerable to high inflation levels and rising interest rates. Irrespective of business cycles, these low-debt companies are best positioned to leverage cost advantages. In a nutshell, you need to buy companies that do not guzzle capital in a big way.
- As the world gets increasingly globalized, investors also need to look at global opportunities to capitalize on. One such option is the global ETF. The advantage is the variety that you get. There are global ETFs on gold, commodities, dollar-denominated assets, global indices, etc. Depending on which asset class is expected to do well, you can allocate a small portion of your money to these global ETFs for the sake of alpha. These global ETFs also offer inflation protection. If India is facing high inflation, you can look at other economies with relatively lower inflation. This will not only diversify your India-specific risk but will also open up an asset class that is not contingent on the economic situation in India.
- Finally, you can consider real estate investment trusts (REITS) and infrastructure investment trusts (InvITs). These are like mutual funds, the only difference being that the underlying asset is either real estate properties or infrastructure assets. This gives investors an opportunity to earn consistent returns and also gives them diversification through a securitized exposure to real estate. Further, real estate is yet to emerge as a distinct asset class in an organized way, and this could be your wealth creating opportunity.
Now that you are equipped with knowledge on various investment avenues, take the first step to wealth creation today to ensure that you retire rich tomorrow!