Magic Formula of Wealth Creation..
by Mr. Rahul Parikh, Aditya Birla Money My
Universe
There is a Mr. A. Although he has always been
particular & disciplined about money management, wealth creation has
remained a distant dream for him.
Despite noting down every expense for the past 20
years and ensuring that he saves something to put in his bank account, he has
failed to figure out the reason why his Rs.2 lakh-a-month salary is not enough
to create wealth.
Like most of us, he blames the rising cost of
living and curses the fact that he is not making enough money to live his
dreams.
He remembers the time when a family of four would
go out for a movie and come home having spent not even Rs.100. And today, a
family weekend at the movies will cost you nothing less than Rs.1,000.
Sounds familiar?
Mr. A is none other than R. K. Laxman’s common
man; that common man who is working up a sweat to make money.
No matter what, prices of products and services
are rising and it is becoming difficult to keep pace. So, what options does a
common man have?
Does he compromise on his family’s lifestyle?
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| Mr. Rahul Parikh, Aditya Birla Money My Universe |
Or look for another job?
Or does he put money in equities in the hope of
making a quick buck?
Or should he stop dreaming about wealth creation?
one of these would be necessary.
Mr. A can create wealth by managing his personal
finances better and ensuring that inflation and volatility become his friends
in his journey towards wealth creation.
1. Beware of hidden tax inflation..!
Inflation is mostly seen in a negative light.
However, having good inflation is not necessarily a bad thing as it can
indicate economic growth and the likelihood of assets appreciating.
Thus, the real question is to figure out the
assets that will appreciate more than inflation and deliver positive real rate
of returns. If your assets are appreciating less than inflation, then you are
losing money in real terms as the purchasing power of your money is depleting.
Further, the diminishing value of currency makes
the same amount of money incapable of purchasing as much.
Historically, gold has been considered as store
of value and a hedge against inflation.
However, there have been periods when gold has
given negative returns in spite of high inflation. Another favourite, fixed
deposits, also hardly beat inflation especially post-taxation of interest
income.
Various studies show that equity has outperformed
all other asset classes in the longer run and has also beaten inflation by a
wide margin, thus giving a positive real rate of return, and the same done
consistently over several years has led to compounding and wealth creation.
2. Befriending volatility..!
The sooner we realise that risk and return go
hand in hand, the faster our money will work for us.
Many investors shy away from investments in
volatile asset classes or market-linked investments, especially when markets
are volatile. As American entrepreneur, and investor, Robert Arnott rightly
said, “In investing, what is comfortable is rarely profitable.”
The safest way to keep money is probably in cash
or in a savings account, but that would hardly lead to any kind of returns, and
most importantly, doing so will make you lose the worth of your money.
On the other hand, an asset class like equities
can be volatile, but can give you better long-term returns.
So, the best way to befriend volatility is to be
disciplined and invest systematically and for the long term.
A 10-15-year period of investing in equity can
significantly improve chances of better returns, yet lower deviations or in
other words, volatility. By being disciplined in investing systematically in
equities through mutual funds, you make the best of both highs and lows which
can eventually bring down the cost of acquisition.
3. Somethings work better in the long run..!
It is high time we realise that as prices go up,
savings alone will not do the trick. Investing in financial instruments that
can sustain and grow the value of your money is probably the wisest choice.
Over the years, long-term investments have
displayed remarkable performance in both favourable and unfavourable economic
circumstances.
Thus, investing for longer periods in asset
classes, like equity, which can beat inflation over the long term, is the best
way to consistently get positive real rate of returns compounded, which in turn
leads to wealth creation.
Investing in equities systematically through
vehicles like mutual funds brings down the risk of market volatility and
concentration.
4. Magic formula of wealth creation..!
The simple approach to wealth creation is to
practice three things consistently.
First, the purpose of investing is to beat
inflation. Second, compounding for long term is the only magic that works for
wealth creation.
And third, asset allocation and systematic
investments are the proper ways to compound.
The secret to wealth creation, and beating
inflation and market volatility is to invest in fundamentally sound equity
assets through well-selected mutual funds using the monthly systematic
investment plan route.
Disciplined investing in the equity market will
ensure that your personal finance does not suffer, irrespective of market
volatility and high inflation.
About the author..
Mr. Rahul Parikh is Head at Aditya Birla Money My
Universe.
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