Wealth creation has various stages and there are various measures that one should take to ensure the goal is achieved. This article attempts to guide how one should drive the vehicle of wealth creation. The various stages involved during the drive and the measures to be taken during each stage are explained here comparing to the stages involved in driving a vehicle, for readers to relate easily. This suggestion takes into consideration how the risk appetite of a person transitions with age and increase in income.
The First Gear: The first shift of gear which you make towards investing should ideally be through SIP (Systematic Investment Plan) in equity mutual funds which give the luxury of a professional fund manager working for you, the convenience of recurring investment, the advantage of investing at various market levels and great wealth multiplication potential. This should happen at your first stage of occupation when you are in the early to mid 20s. While you make the beginning for SIP investing at this stage, you need to consciously increase your SIP contribution as your income grows.
This discipline of SIP investing would be the fulcrum of your wealth creation process and would be a major contributor to fulfilling most of your financial goals like accumulating a handsome down-payment amount for your house purchase, children’s higher education, their wedding and your retirement planning.
Second Gear: The second gear of investments needs to be applied when you are in the late 20s or early 30s when you have a spouse and child/children. Higher responsibility comes along with the formation of your family. So in the interest of protecting your family from uncertainties, you should take a term insurance plan and a health insurance. Term insurance protects the family from financial instability that can be caused due to the unfortunate demise of the policy holder. Health insurance protects your wallet from the burden of medical expenses. This is also the phase when you should consider purchase of a house if you would need one, to ensure that you are able to close your home loan before you are fifty. In a way this phase is very eventful with many new beginnings.
Third Gear: While the third gear is the first important step to momentum while driving a vehicle, when it comes to investments, it’s the time when stability has to be looked at. You should start creating a corpus of fixed income investments spread across fixed deposits, bonds and debt funds to give the portfolio the much needed stability . This would cool down the heat from the risk of equities in the portfolio and de-risk the portfolio. This typically should be done when you are in your mid to late thirties. Also, by now your experience of SIP investments in equity funds should have increased your confidence on equities and you should start accumulating stocks on monthly basis to build a direct equity portfolio.
Fourth Gear: Next is an important shift which is to the fourth gear which would be the acceleration phase. At this stage, when you are in your early 40s, you need to take the early moves towards creating a retirement corpus through NPS (National Pension System) through SIP mode . NPS can be looked at even in the "Third Gear" phase. As this happens to be the phase when you would have a big jump in your income, start making lumpsum investments in equity and hybrid mutual fund schemes and also in direct equities. The lumpsum investments can grow to a sizeable corpus to meet major goals like higher education of children and their wedding expenses which occur during your late 40s to mid 50s.
Fifth Gear: The fifth gear to investments needs to be shifted when you are in your late forties. This is the phase that you may get lumpy remuneration and so can look at high ticket investment options like PMS which have a high entry value and have high risk associated. The investments done by PMS are highly concentrated with regulations permitting the same, unlike investments in mutual funds which have limitations in exposure to a single scrip/security. The concentrated investment in securities which are promising can potentially yield higher returns.
Sixth Gear: The top gear of investment shift which happens in your early fifties is when you can afford to look at exotic investment options like PE/VC funds with the objective of seeing the capital growing in multiples before you hang up your boots. The investment in PE/VC funds when held for long term, typically 7 to 10 years, can potentially give exponential growth. You assume high appetite for risk at this stage of life due to your increase in earnings.
Neutral Gear: While this is the pattern in which you should drive to wealth creation, you will have to get back to the neutral gear regularly and ensure asset allocation rebalancing , which should be once in 6 months .
Regular Service: Your vehicle of investment portfolio should hit the workshop for regular service which is portfolio review in investment language. This regular portfolio review needs to be done once in 3 months.
The Big U-Turn: Don’t miss to make the big U-Turn in your investment journey in your late 50s when you do a major restructure of your portfolio moving from the so far equity heavy portfolio to stability, shifting largely to fixed income investments and hybrid mutual funds, leaving just about a quarter of your portfolio in equities based on your risk appetite. That said, if you have a high risk appetite financial status wise and have a sizeable retirement corpus in stable investments after which you have a large portion of the portfolio available to afford the risk of equities, you may do so. This presumptively is to leave as legacy. Very important factor to be kept in mind is the emotional appetite for shocks is weak in the older ages and if you are taking higher exposure to equities, you should be able to digest the erratic movements in the portfolio value due to market volatilities.
As required during driving a vehicle, a safe and stress-free drive is essential in the wealth creation journey too.
Most investors may not be able to handle this highly dynamic drive themselves. They can opt for an experts guidance who will help them take the drive in an automatic mode.
V. Krishna Dassan is Director, Dhanavruksha Financial Services Pvt. Ltd.