Brief Background
Generally when people are advised to do investment planning or think about starting an investment, they feel investment means investment in
- Bank Fixed Deposit
- Tax saving instrument like National Saving Scheme (NSC), Public Provident Fund (PPF), money back insurance plan
- Gold buying
The investment is based on left out income after all their expenses.
Traditionally, the investment decision is made by father or grandfather on behalf of the children and the children when grow will make the decision on investment based on the same investment pattern of their parents or grandparents. Many times, these decisions are also based on free advice of insurance agent who has very limited knowledge about the various other instruments of investment. The main or ideal purpose of these investments is safety, risk free income, tax saving purpose.
Objective of investment decision is very important
Generally peoples thinks or feels that only rich people can create wealth. Only those people who have money can build the wealth. But it is not the case. Of course, the rich people build the wealth then ordinary people because of the following reasons:
- Purpose is to build the wealth
- Tax Saving is the secondary object
- Willingness to take the risk of loss
- Identifying the investment opportunities in non-traditional investment instruments
- Take the help of experts or professional investment advisors by paying their professional fees
When a person has different mindset he always tends to behave accordingly. E.g. when the a person has mindset to earn risk free return automatically he will limit his thinking and will concentrate only on those instruments or investment option which will give him risk free return even though such returns are insufficient or meager. On the other hand, a person with mindset of building the wealth will think broadly and find out the various investment options available which includes taking of certain risk associated with income. Such person will identify the investment opportunities and grab the opportunity available to him.
As a result, such person is able to generate the wealth.
Reasons for such behavior
The main reasons of such behavior is mainly because our parents, grandparents have born and lived in the era of economy where everything was closed, resources and opportunities were limited, earning potentials were limited, there was no technologically. Hence, the vision of such people is limited. They want security. Their nature is to live in what is available.
This behavior pattern is also reflecting in their investment strategy.
The focus should be more on wealth creation rather than tax saving
The focus should always be more on creating the wealth then worrying about tax saving. This is because when more wealth is generated, the amount of tax paid on such wealth will be less.
Further, in todays’ time due to opening up of economy, technological advancement, people become more conscious about the healthy lifestyle. There is total change in lifestyle and behavior of people. People started spending money lavishly.
e.g. earlier only Parle G or Britannia biscuits brands were available now there are other international brands available in the market. Today Parle G Biscuits is mostly not so popular in upper class family. Oreo or other biscuit brand is popular in daily life consumption. Similarly earlier people use to spend money mostly on one pair or two pairs of shoes of Bata or Action Shoes brands with limited price, now people have pairs of shoes of Woodlands, US Polo Brands. Instead of money, now brand have become more important. Earlier there was only one telephone connection per house but now each member in house has mobile phone connection.
The cruxes of these examples are that earlier there was less income and spending was also within the limited income. Now, though the income level is increased to many folds as compare to earlier period, expenses were also gone high. Thanks to plastic money in the form of credit card, people think first about the expenses and then generate the income. Even the expectations in the family members of people have increased. And to meet such expectation in todays’ time, wealth creation is inevitable.
To conclude, in today’s time, instead of tax saving purpose or risk free income generation purpose, one must think of building the wealth and strategies the investment plan accordingly with horizon of building wealth over a period of 5 to 10 years.
The various instruments available to maximize the returns are
- Bonds issued by private company, Government Company
- Preference Shares of Private Company or Public Company or Banks
- ULIP Insurance Plans
- Mutual Fund ELSS Plans
- Equity Shares of fundamentally sound Company listed on recognised stock exchange
To achieve the wealth creation within the fixed horizon, one should adopt the following strategy
- Decide the period within which the wealth should be Build
- Invest first then spend instead spend first invest from remaining income strategy
- Take help of professional investment expert by paying proper fees
- Don’t lure by quick returns on short term period say in two months or three months income double funda, it never happens
- Invest systematic and regularly. Single investment will not generate sufficient income. e.g. Every day we need food to keep ourselves alive same way invest regularly then only it will grow and start generating income
- Invest and forget it. Review the same only after end of periodic interval. Don’t panic and have faith in your decision
- Grab the opportunity; generate risk bearing capacity because when there is more risk there is more income. Hence take a balance risk in investment. Invest in financial instrument which has higher income with moderate risk associated with it
- Spend wisely don’t by unwanted things remember every rupee saved is every rupee earn
- Some advisers solicit the client by way of offering the kick back on the commission income. Such agents’ purpose is only to earn the commission. They will not advice based on the needs of the client. As a result investor loose the money or income will be less generated on their investment. Avoid such advisers.
- Start investing at early age or young age. Inculcate saving habits in your children
- Make some investment when child is small in his/her name and when one is young with limited responsibility
Disclaimer Note: Given Examples are hypothetical in nature. The purpose of these examples is to explain the concept and not to harm or defame any brand or product
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