Individuals prefer to keep their money in savings accounts, trusting it is safe. What they do not realise is that since the returns from these accounts are lesser than the inflation rate, over time, their money loses its value.
Having said that, technology is playing a big role in improving financial literacy. Fintech companies and financial institutions are leveraging user-friendly interfaces, informative content, and investment tools to educate and empower individuals to make informed investment decisions.
Yet, it is natural to feel overwhelmed by the multiple options available to investors. How does one pick the right asset class to invest in? How do you know what is right for you? I have found that the following ‘Truths of Investing’ serve as a handy guide for investors in their wealth creation journey.
Here’s how you can also build long-term wealth:
● Start investing, even with small amounts, but stay invested for the long term: Investing even with small amounts and staying invested for the long term can be a powerful wealth-building strategy. For example, had you invested even Rs 5,000 per month in an SIP (systematic investment plan) that gave you an average annual return of 13% over 25 years, you could have built a corpus of over Rs. 1 crore. This is nothing but the power of compounding.
● Not investing at all, is risky: Money not invested, is money wasted. Inflation does not only mean a rise in prices. It also means a decline in the value of money. If not invested, Rs 1 lakh today will only buy you goods worth Rs 22,000 in 25 years (if you take annual inflation at 6%). To beat inflation, invest in an asset that grows faster than the inflation rate. For instance, equity has grown at an average 13% annually as compared to inflation’s 6% growth.
● Start with tracking the indices: Learn not to respond to short-term market fluctuations. Instead, focus on fundamental trends for long-term benefits. Invest in the NIFTY50 which represents a portfolio of the top 50 companies in India, via an Index fund. Essentially, index funds are passive funds that build a portfolio which is a copy of the index and give returns similar to the market. These thus, provide a low-cost investment option with diversification across multiple companies and sectors. It allows investors to benefit from the overall market performance and minimises the risk associated with individual stock selection.
● Look at risk and returns: Investors typically pick funds based solely on their annual returns, but looking at risk is equally important. How does the fund manage risks? Does it give you a consistent return every year or does it fluctuate? Ideally you want to pick a fund that gives you high returns at low risk. At Upstox, we have done all this research and curated a list of top funds to make investing easier.
● Invest in equities and save tax: ELSS or Equity linked savings schemes are a category of mutual funds that let you earn market linked returns and save taxes, simultaneously. Available to investors who opt for the old tax regime, you can save up to Rs. 46,800 in taxes under section 80C via ELSS investments. The best part – it has a lock-in period of only three years – least among tax-saving instruments.
● Diversify: Diversification is critical for an investment portfolio to manage risks. Different asset classes perform differently under varied circumstances. Hence, it is always advisable not to concentrate investments in a single stock, trade or asset class. Invest a part of your money in debt assets like fixed income funds and in sovereign gold bonds issued by the government. This will insulate your portfolio from market volatility.
● Choose direct mutual funds over regular plans: Why spend extra? Buying a Direct mutual fund plan is like buying goods from the company. You don’t pay the agent and have a lower expense ratio. Regular plans may have higher fees and commissions, resulting in lower net returns for investors. Hence, choosing direct plans may result in lower costs and higher overall returns over the long term. Carefully evaluating expenses and fees is crucial for mutual fund investments, and direct plans can be a cost-effective option for higher net returns.
To reiterate, it is riskier to not invest. So, start investing now and stay invested to build long-term wealth. India is the fastest growing large economy in the world and is projected to overtake the US economy in the next 25 years. This is a strong long-term fundamental story to invest in. So, take a long term perspective and align your investment goals with India’s growth story. These ‘Truths of investing’ should help you get started on your journey to wealth creation.
(The author is CEO and Co-founder, Upstox)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of Economic Times)