Why is wealth creation a hot topic in today's era? As the saying goes, “Building wealth is a Marathon, not a sprint.” Wealth creation is not an overnight journey. It requires a good investment vehicle and proper financial knowledge. There are several factors that affect the investment decision in the long drive of WEALTH CREATION.
In today’s world, many of us still rely on the traditional way of investing, i.e., fixed deposits, public provident fund, and recurring deposits, to create wealth. Have you ever thought whether these investment avenues are really creating wealth or just eating up your money? Can these investment avenues beat inflation and provide you good return on your money? These are the common questions that you have to think about while you are in the process of wealth creation.
Talking about a conventional & established way of investing i.e., “Mutual Fund”. Mutual fund, because of numerous factor sit can be one of the best investment avenue for creating wealth. If you have seenthe performance of mutual fund in previous years, mutual fund has provided a good return over the inflation rate. Also, with diversification of funds by a fund manager and a dedicated objective makes it more appealing avenue as compared to traditional ones. If your investment gives you more than inflation only then you create wealth.
If you compare the traditional way -Fixed Deposit or Public Provident Fund with the conventional way -Mutual Fund, you will see that you can have access to a variety of funds, namely Equity, Debt, gold, etc. Also, you can take the benefit of compounding in longer period through a Systematic Investment Plan i.e., SIP in a mutual fund to create wealth. You can even start with a smaller amount of Rs 1000 monthly in a mutual fund scheme.
Lets Understand with an example, if you invest Rs 5000 monthly into Mutual fund for next 20 years with average return of 12%, you will get aprrox Rs45.55 lakhs as compared to Rs 25.37 lakhs in fixed deposits(7%) and Rs 25.66 lakhs in Public Provident Fund(7.1%).
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Mutual fund
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Fixed Deposits
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Public Provident Fund
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Rs 5,000 @12% for 20 years
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Rs 5,000 @7% for 20 years
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Rs 5,000 @7.1 for 20 years
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Wealth – Rs 45.55
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Wealth – Rs 25.37
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Wealth – Rs 25.66
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The table above clearly shows how mutual fund helps you in creating wealth and helps in you achieving your desired goal.
Another hindrance to wealth creation is “Inaccurate Tax planning” of your investment. Many people end up paying high taxes on their entire portfolio, and thus it erodes their wealth, and in the end, they have fewer sweets on their plate. Talking aboutmutual fund, as per the new Income Tax guidelines, you get the tax benefit of Rs 1.25 lakhs per year on the capital gain, which means if your investment earns a capital gain of Rs 1 lakh on the entire portfolio in a given year, then you don’t have to pay any tax on it. Whereas, interest on fixed deposit is added to your total income, and tax is paid as per the applicable slab of income tax. That is why proper tax planning is required to create wealth. People also talk about other avenues like public provident fund or real estate for wealth creation, but the truth is that they have their pros and cons and are not wealth creators.
In real estate, first, you must make a down payment, which requires a substantial lump sum. Second, for the remaining amount, you need to secure a home loan, which entails paying interest over a longer period. Based on these factors, it may not be a viable investment option for wealth creation. People normally invest in a house, if it is for self-use not as an investment.
Another factor that impacts wealth creation is “Age and Risk Profile”. If you start your wealth creation journey at age 45, you can’t invest aggressively in equities for creating wealth. Generally, The risk profile of a person changes as age grows.People who are in their 30s can invest aggressively in equities as compared to people who are in their 50’s.
If you really want to create wealth, you need to start this journey early in your 30s. Let's say you want to have a wealth of Rs 2 crore when you retire at age 60. You need to set up SIP of Rs 6500 monthly, if you start at age 30 and if you delay this just by 10 years, say in age 40, you need to do SIP of Rs 22000 monthly (Assuming Return -12%, Retirement age – 60). This clearly shows how age plays a vital role in wealth creation.
You can analyze from the above that the traditional ways of investment are not the good wealth creators. If you want to create wealth and want to be financially free, you have to shift your mind from traditional way to conventional way of investing and also you have to be financially literate in respect of creating wealth.
