The key to build wealth is to invest regularly to benefit from the power of compounding
If you start early, you save more due to the power of compounding, even if you start with a small amount. You just need to invest regularly and keep reinvesting the returns over longer periods. For example, Sunil invests Rs.2,500 every month from the age of 25. His friend Anil starts saving Rs.5,000 every month 10 years later. At the age of 45, on an assumed return of 12 per cent, Sunil's kitty is a sizeable Rs.24 lakh, while Anil's is half at Rs.12 lakh despite him investing double the amount every month. In fact, both have invested the same amount as principal of Rs.6 lakhs for 20 and 10 years respectively. So it is not only 'how much' you invest but also 'how long' you invest that is more important.
You can save a lot and yet be forced to be miserly when you need money. The slip between the cup and the lip can happen if you haven't given your savings the right opportunity to grow. On an average, Indians are saving more, but the savings are being invested in lower risk lower return options (assured returns products) such as bank fixed deposits, provident funds, postal savings or traditional life insurance products. Some of these investments happen by default like the Employees' Provident Fund (EPF) where 12 per cent of your basic pay gets deducted every month. A popular traditional savings route is a recurring deposit account in a bank to save for medium-tolong- term goals. It is observed that Indian investors are generally risk averse as they lack social security and hence prefer assured returns products.
THE REAL RETURN
In the current scenario, it may be difficult to meet life goals by saving only through the above assured returns products. The annualised returns (pre-tax) from such assured returns products are usually in single digits and are reduced further when adjusted for tax and inflation. In real terms (after adjusting for inflation), the returns may even be negative at times. Hence it is also important to invest in asset classes/products which have the ability to give higher post tax and inflation adjusted returns so as to meet all life time goals as well as create wealth to lead a stress-free retired life.
WHY EQUITY AS AN ASSET CLASS?
If beating inflation and higher post tax returns is the motive then equity as an asset class would be good to look at. Historically equity has been among the top performing asset classes over the long-term (10 years and above). Current tax laws also provide for nil long term capital gains tax (tax free returns) for a holding period of more than one year. Generally most investors fear that equity may provide negative returns but the probability of this is high only if the holding period is short. The probability of a loss decline significantly as the holding period is longer, especially beyond 10 years. A general thumb rule is that the longer you remain invested in equity, the higher the potential of wealth creation
HOW TO BENEFIT
To benefit from the long-term return potential of equities, it is important to make an early start. This will help you remain invested for a longer period as well as help you meet your goals in a timely manner. A good approach towards equity-based products like equity mutual funds (MFs) is through systematic investment plans (SIPs) which helps to invest regularly in a disciplined manner. One may start a monthly SIP in equity mutual funds of one's choice. Ideally you must start saving from your first job to get a headstart and benefit from the power of compounding.
CONCLUSION
One needs to upgrade from investing in mere assured returns products to active investing to meet major life goals as well as create a corpus for the post retirement period. Equity is one of the best performing asset classes in the long run as well as has the potential to provide higher inflation adjusted and tax adjusted returns. The only condition is that one must invest regularly and for the long run. Remember, it is not only 'how much' you invest but also 'how long' you invest that is important especially in case of equities.
If you start early, you save more due to the power of compounding, even if you start with a small amount. You just need to invest regularly and keep reinvesting the returns over longer periods. For example, Sunil invests Rs.2,500 every month from the age of 25. His friend Anil starts saving Rs.5,000 every month 10 years later. At the age of 45, on an assumed return of 12 per cent, Sunil's kitty is a sizeable Rs.24 lakh, while Anil's is half at Rs.12 lakh despite him investing double the amount every month. In fact, both have invested the same amount as principal of Rs.6 lakhs for 20 and 10 years respectively. So it is not only 'how much' you invest but also 'how long' you invest that is more important.
You can save a lot and yet be forced to be miserly when you need money. The slip between the cup and the lip can happen if you haven't given your savings the right opportunity to grow. On an average, Indians are saving more, but the savings are being invested in lower risk lower return options (assured returns products) such as bank fixed deposits, provident funds, postal savings or traditional life insurance products. Some of these investments happen by default like the Employees' Provident Fund (EPF) where 12 per cent of your basic pay gets deducted every month. A popular traditional savings route is a recurring deposit account in a bank to save for medium-tolong- term goals. It is observed that Indian investors are generally risk averse as they lack social security and hence prefer assured returns products.
THE REAL RETURN
In the current scenario, it may be difficult to meet life goals by saving only through the above assured returns products. The annualised returns (pre-tax) from such assured returns products are usually in single digits and are reduced further when adjusted for tax and inflation. In real terms (after adjusting for inflation), the returns may even be negative at times. Hence it is also important to invest in asset classes/products which have the ability to give higher post tax and inflation adjusted returns so as to meet all life time goals as well as create wealth to lead a stress-free retired life.
WHY EQUITY AS AN ASSET CLASS?
If beating inflation and higher post tax returns is the motive then equity as an asset class would be good to look at. Historically equity has been among the top performing asset classes over the long-term (10 years and above). Current tax laws also provide for nil long term capital gains tax (tax free returns) for a holding period of more than one year. Generally most investors fear that equity may provide negative returns but the probability of this is high only if the holding period is short. The probability of a loss decline significantly as the holding period is longer, especially beyond 10 years. A general thumb rule is that the longer you remain invested in equity, the higher the potential of wealth creation
HOW TO BENEFIT
To benefit from the long-term return potential of equities, it is important to make an early start. This will help you remain invested for a longer period as well as help you meet your goals in a timely manner. A good approach towards equity-based products like equity mutual funds (MFs) is through systematic investment plans (SIPs) which helps to invest regularly in a disciplined manner. One may start a monthly SIP in equity mutual funds of one's choice. Ideally you must start saving from your first job to get a headstart and benefit from the power of compounding.
CONCLUSION
One needs to upgrade from investing in mere assured returns products to active investing to meet major life goals as well as create a corpus for the post retirement period. Equity is one of the best performing asset classes in the long run as well as has the potential to provide higher inflation adjusted and tax adjusted returns. The only condition is that one must invest regularly and for the long run. Remember, it is not only 'how much' you invest but also 'how long' you invest that is important especially in case of equities.
