5 Tips on How to Make Money and Create Wealth By Aditi Kothari

We are all different people, with different requirements and income levels. But, most of us have one goal in common and that is to make money and create wealth, i.e., log anek par goal ek. Many people would have told you that it is very easy to make money online or to create wealth while there might be others who would have told you that wealth creation is a very difficult task.

Well, both these people are partially correct and partially wrong. It is indeed not easy to make money online and create wealth. However, if you follow just a few basic investment tenets and continue your investing journey in a disciplined manner, then you will be well on your way to making money and creating wealth.

Guest:
Aditi Kothari, Vice Chairperson & Head of Sales, Marketing and e-Business at DSP Investment Managers Pvt Ltd. She also serves as a member of the Executive Committee. Aditi is passionate about educating and guiding investors in the right way and has set up several initiatives that aim to ensure that the full benefits of investing can accrue to all members of the population, especially to the female members of the society.

1. What are the top 5 things which can help young investors on their wealth creation journey?

The most important aspects to keep in mind, as you start your investment journey, include:
 
a) If you really want to make money, then you must start your investing journey as early as possible. Always remember that the market does not move in a straight line and nor will your investment portfolio. You can take more risks if you start early and accumulate money to enjoy your life in the later stages. Starting early will offer you exponential returns over your investment period by helping you enjoy the fruits of compounding.

You can use the rule of 72 to understand how your money will grow. The rule of 72 basically says that if you divide 72 by your expected rate of return, you will know in how much time period your money is expected to double. For example, assume your expected rate of return on an investment is 7%. Now, when you apply the rule of 72, i.e., divide 72 by 7, you arrive at 10 as the answer. This means that it will approximately take you 10 years to double your money, if it was invested at 7% per annum.

b) If you are a beginner, don’t invest your money all at once. Invest in small proportions and automate your investments via Systematic Investment Plans (SIPs). You can also try top-up SIPs to ensure that your savings increase in proportion to your earnings. Start small and build your wealth over time. You can even start with as little as 500 rupees, but it is better to make the investment amount a portion of what you earn. Follow the 50:30:20 rule, where 50% of your salary goes into your routine expenses, 30% is spent on entertainment, and 20% is allocated for disciplined savings. Continue this investment through market ups and downs and remember that market downs are the best time for investments.

c) Before you invest, create your risk profile and invest accordingly. Know your risk-taking ability based on your age, number of dependents, and whether you are earning well and regularly. If you are older, and living off your pension, your risk ability is lower. Also assess your risk tolerance, which can help you understand your comfort level with the inherent risks in the market. If you are in the market for the long run, you don’t have to worry about intermittent fluctuations.

Also, take your financial goals into account to complete the equation. Approach a good financial planner to make better and less emotional assessments. If you have longer term goals, you can undertake riskier propositions and vice versa. Balance these three aspects to take proper financial decisions and avoid tips from friends and well-wishers as they are not in a position to assess your unique requirements.

d) Asset allocation is very important. Do not put all your eggs in one basket. You must balance debt and equity, according to your risk profile, tolerance, and goals. If you are more conservative, allot more of your corpus to fixed income and if you have high risk tolerance and a long-term investment horizon, then park more in equity.

e) Learn the right way to invest. Do your homework, talk to investment managers and remember to create an emergency corpus which is invested in liquid funds.
 
2. How can investors benefit from rupee cost averaging and why is it all the more helpful when it comes to SIPs?
 
When you start an SIP, you invest a fixed amount of money at regular time intervals. The fixed amount of money will be invested in the market irrespective of whether the markets are moving up or down. Rupee cost averaging ensures that you can buy more units when the markets are down, offsetting the fewer units you are buying when markets are high. Rupee cost averaging helps you overcome the volatility of markets. No one can really time the market and rupee cost averaging can help you average out the cost of investment over a period of time.
 
SIPs are the best ways to benefit from this equation as it helps you overcome fear and human biases. Investment decisions are all about emotions and you should be able to control your emotions when the market goes down. Do not be scared. Automated SIPs are emotionless decisions that can help you make money and create wealth over the longer term.
 
3. What are some aspects to be kept in mind while deciding on optimal asset allocation?
 
The following aspects are of utmost importance when it comes to asset allocation:

i) Risk profiling is the best and only way to allocate responsibly.

ii) Understand your circumstances and accordingly diversify your portfolio

iii) Park your corpus across asset classes which do not react to volatility in similar ways

iv) Create a unique asset allocation plan, instead of following your friends or people you know as each of us have different risk profiles and financial goals
 
4. How important is financial education and research when we begin the investment journey?

Whether you want to make money through direct stock investing or mutual fund investments, do your own homework. Do not depend on outside information only as it does not factor in your unique requirements and personality traits. Always do your homework and be financially empowered by understanding where you are investing and why.

5. What are the key takeaways from the interview?

i) Start early.

ii) Follow the rule of 72 for understanding how fast your money will double.

iii) Automate your investments through SIPs.

iv) Remember to undergo risk profiling and understand your risk tolerance and financial goals.

v) Do not forget asset allocation.

vi) Take charge, approach a financial advisor if you are not confident, and never stop your SIPs.