How to create wealth from your savings?
We belong to a conservative culture where saving habits are embedded in our DNA. As a country, we prefer to save rather than spend, unlike developed economies that are fueled by demand dictated by the spending of their domestic economies. Saving comes naturally and each of us saves for the future in our own way. Whether we put our savings in a bank FD or contribute to PPF or reduce home loan EMI management costs, savings is all we do. But what about increasing your money to something outside of savings that might get you 8% – 9% returns at best, half of which is somehow eaten up by inflation?
That is, when savings and investments we come together to help you build wealth and have a sense of financial security. Having a job is not enough to feel financially secure because what is left of your salary after paying all your monthly expenses is not enough to pay for future one-time expenses that will become due over time. A salary and savings from a salary cannot provide for big things in life such as children’s college education, their weddings, health care expenses in old age, and expenses for the long, retired phase of your life, when a salary would no longer cushion you. It is imperative to put your savings into investment avenues where they can grow manifold in the long run.
You need to understand the difference between short-term and long-term investment decisions so that you take a holistic approach to building financial security and wealth.
- Certain short-term goals
- Don’t let your money sit idle in the bank
- Invest in balanced mutual funds for medium term goals
- Invest in long-term equity-oriented options
- Be flexible, periodically monitor and rebalance your portfolio
- Seek professional advice
Short-term goals are usually defined as milestones you want to achieve in the next 1-3 years. If there are some short term goals which you cannot afford to miss, go for savings options like bank FD or better still invest in suitable debt mutual funds if you are happy with mutual funds. Fixed income mutual funds or debt funds are safer than equity oriented mutual funds and have the potential to offer you higher returns than bank FDs. But you need to research well or take the help of investment advisor to choose the right funds that go well with your financial objective and risk tolerance.
Most people simply let their money sit in their savings bank account, even when the amount is significantly higher than needed to manage day-to-day expenses. Don’t let excess money sit in a savings deposit. Rather invest it in a liquid mutual fund which can potentially offer you a higher return than what the bank would offer you. Liquid funds are convenient to operate as they have no entry and exit charges and the redemption money is available to you the next business day when you want to sell your holding in the fund. Liquid funds are best suited for investing excess cash over a period of 1 to 90 days and are the least volatile of all mutual funds.
If there are some requirements that you expect to become due in the next 3-5 years, choosing a balanced mutual fund or a suitable hybrid mutual fund can be a good option. Balanced funds, which are type hybrid mutual fund invest in a mix of equity and debt securities. They capture the characteristics of both equity and debt funds while offering a moderate risk and return proposition to their investors, suitable for those who prefer to play it safe while looking for some upside potential in the stock.
When financial goal is very far, say your retirement life which will start in 15 years or your daughter’s higher education which will become due in 7 years, the best option to choose would be a well diversified equity fund . Equity funds are best suited for long-term investments after 5 years as stocks are prone to higher volatility in short term but can provide good returns in long term. Invest wisely in several equity funds that suit your personality ie. your willingness to take the risk. You can also consider investing directly in stocks, but mutual funds are more suitable for those who don’t like to take risk with stocks. Always try to understand everything mutual fund risk before investing in them.
Once you have invested your money in various Mutual Funds, FDs, Shares, ULIPs, PPFs etc, the job is half done. You should monitor your portfolio regularly and make changes as needed. Rebalancing is necessary to reflect any changes in your life circumstances. For example, you are switching jobs from an MNC to a start-up where the risks are higher. In such a situation, your portfolio’s exposure to stocks should be reduced because your human capital is already invested in high-risk capital. Working for startups is only as good as owning venture capital.
It is best to seek professional advice from an investment advisor or take the help of mutual fund distributors to go through the documentation and transaction requirements. The investment advisor will do your risk profiling and perform a suitability analysis before recommending an investment plan. It might be worth accepting such help when you’re investing your hard-earned money for the long term. Take time to understand
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