India is a developing country and the ambition in our youth to have a crore in their bank is also developing in same pace. Wealth of India and Indians is a well-known phenomenon in this world. We were once considered the richest land. Even now we have few wealthy people who can give tough competition to other rich men around the planet. Indians grow up understanding and tagging wealth to gold and property. Most of the current generation had seen a struggling prior generation and/or heard of previous generations working hard to earn wealth. Most of the Indians didn't have housing in earlier generations and the ones who had been the landlords often lending money and renting property to the larger masses. This practice had led to our ancestors often linking richness to having property for rent.
Our rich dad poor dad preaches us to have assets which are earning bucks for us versus sitting idle and shut which links to having rented property. We often overlook the fact that when is buying or building a property to rent a wise move versus not investing in property. The below example shows a rental yield in one of the most popular location in Bangalore is 4% of the apartment value which means if you had invested 1crore in the apartment, in the current rate it would take 25Years to recover the cost. Assuming someone taking a property on loan, you would have easily paid more than 2crore in 25Years to close the loan which challenges the rental yield further. After adding up the depreciations in a building in 25Years, the value of the apartment can be further imagined still as 1crore post 25Years. Interestingly in the event of you trying to sell it, very few buyers would come forward as there will be more loans available for the future buyers with lower interest rates to buy a new launch property. I understand this is a debatable topic, do you think our ancestors were wrong in identifying property as an important asset, not really.
They were right, only thing is the price in ownership to the current earnings to future yield is where the mathematics becomes challenging. However in case of land, there is better appreciation and lower monthly yields. But a land loan in India forces the loanee to build within the tenure to convert to a property loan in case of large sums it becomes impractical to continue the loan too. In short, if there is lumpsum available or a big chunk of money available for upfront payment buying a well-documented land is a better bet for people if vetted properly. There is a high chance that for most of the Indians who are relying of jobs to have these kind of lumpsum amount lying around. It is good to realize that the house we live in is not an investment but a necessity for some even though there are other arguments on renting being more viable and smarter. You could read more on that in the what's real in real estate blog.
We do have a lot of people who still believe in saving money versus investing, often this could be because of non-availability of large sums like in previous real estate example which makes people believe that to invest big you need to save big. The idea is right that you need to make the big money to invest big but that is not linked to saving which is where we miss the plot. Savings is best suited to keep the emergency fund to handle unexpected but expected kind of situations that life throws at us. An identifiable Indian trait is the habit of savings which is kind of getting extinct in the current generations due to various reasons which are beyond this blog. The below interest rate numbers from RBI shows that you could earn a good 6% interests by saving your money.
However Indian inflation is going to eat up a good 5% from the 6% savings we would make from putting our hard-earned money in the bank. The below picture shows India's inflation rate consumer price index which covers the basic requirement to be running our lives in the country.
Having said all these how do we expect the poor to become wealthy with current understanding of life and lifestyles? That is a tough task the elders of current generation need to take in our own hands to guide and drive the younger generation to create wealth not for themselves but for this country too. Obviously whole of the country can't be entrepreneurs as a large workforce had been the backbone of our economy. The secret sauce of getting rich is none other than starting early. There are multiple ways to start early with starting investing as soon as getting a job being the common one. However considering how the parents work in India, they could start it early for their kids too if they are smart enough. For e.g., investing separately for kids to give them a corpus when they start their job or entrepreneur journey. A parent who invests fixed amount separately for a kid similar to how they invest and plan for their retirement can make a big difference in the life of the next generation in India. This is a logic which we often overlook. We have heard parents saving money for kid's education, investing for daughter's wedding, holding on the generational property to handover to next generation and what not. But we seldom hear someone saying I am investing x amount for my kid to continue his/her journey to get wealthy and we want to continue this tradition in all our generations just growing the money. It looks tough but once you do the math you would realize how scary the numbers can look like in two generations timeline itself. Nifty50 in last 11 Years would have fetched us on an average 10.2% growth year on year. I understand we can't take it flat and the entry point into the investment journey matters but as we stay invested longer, nothing else matters. It is the power of compounding that starts its game and does wonders. I am not advocating just to invest blindly in anything, this need to be done with due diligence and many of the investors chooses passive or active funds based on their risk appetite. Most of our generation feels like equities can't fetch much gains based on our experience. Interestingly enough most people had not made their same money spend 20Years in market. Life's challenges or our fear or other priorities would have led us to withdraw sooner which makes us believe that it is not for everyone. There are enough information available over internet for all of us to learn and research on what works. However remember that older we get and more responsibilities creep in, the lesser risks we can take. This is another reason to start the investment journey much younger. As young as when you start your job and your first salary reaches your hands. Create an investment habit that you don't save or invest post your expenses but invest first and rest later. Assume you never got the money which you had invested and don't allow your mind to plan any expense on it. Many of us wants to start our businesses and go through the hussle to earn and grow our money. We believe in ourselves but there are few people who finds it easier to invest in businesses that are growing and often managed by top industrialists who are the best in the lot. Equity is owning a portion of such businesses and at the same time earning a portion of their profits too. Making a wise choice would need expert advice and remember to approach qualified advisors.
When you invest early you have an opportunity to enjoy more years of compounding in life, you also cultivate a habit of investment which gets tougher to start as you get older and gets the taste of spending money on lifestyle. As you can see in the above table, this also gives you time to allow money itself to tackle the bad years and time that comes during this journey again by the time to compound allowing you to timely infuse more capital identifying right opportunities to aggregate or average out your investments to safer zones. Remember man is a creature of habit and the good that habit is better.
If someone manages to just save 15Lakhs in few years with the 10.2% number which we arrived at above could easily make that 15Lakhs a crore in 20 Years without doing anything. There is an alternate postal saving option to double the money every 11Years too in case you think that suits your risk appetite.
We might think where is that 15Lakhs going to come unless the parents technique I mentioned above is followed, for those folks, have a look at what a modest Rs.5000 with an annual increase of 3% can do your savings over 20years. I am passing over the chances of you increasing the 5K to bigger sums as you get older and earn/make more money, I am sure most of you are smart enough to realize that if just a 5K can turn into 50Lakhs with a modest 3% step-up what a larger amount can do to your portfolio.
Another important parameter that is referred in an Indians investment journey is of Gold. I would share a reference here for your detailed learning. In short, the Gold and Sensex evens out into similar 10-12% over the two decades it is compared with similar growth. However interesting thing to note is that with Gold, you have additional risk of storage, loss of value in case you bought an ornament with making charges and while selling often rates are negotiated to lower than the market buying price. With equity, the liquidity is so high and easy that you can sit at home and work with market prices. There are newer ways to invest in Gold which can be understood by interested parties which allows buying and selling in dematerialized forms in India.
How and where you invest your money is completely your risk and responsibility, which is why I would not want to give you any guidance on that as am not qualified, however it is important to know what our options are, how much we want to explore and how easy it is to venture out. The liquidity of an asset is very important in case you would want to generate cash for re-investing into other newer avenues. Many of the investment gurus are strong believers of diversifying our assets into multiple classes into preset proportions based on various factors and there are few who ignores it if there is enough profit made from what you are already investing in.
“The best time to plant a tree was 20 years ago. The second-best time is now.” – Chinese proverb which very well applies to investment!
Comments
Post a Comment
Thanks for reading...happy that I got your time...all your comments are valuable for me.