Investments are something that often put us in a bit of a conundrum. Where should we invest our hard-earned money? How should we grow our wealth? We keep hearing stories of how legendary investors (think Shark Tank) keep repeating that your money should not be kept idle in the bank but should be working for you each day. Yet, we fail to replicate this in reality owing to confusion about investment avenues, allocating our investments and misplaced expectations (not always our own faults) about returns/rewards.
Indeed, investing one’s money smartly is the key towards growing wealth. This is the basic premise that no one can really argue with. However, it is the way you do it that makes a difference. This is where your own effort, homework and initiative to land the right financial advisor/guru (whatever you say) counts immensely. More on that later. For the moment, let’s talk about some of the common investing strategies of our older generations.
How older generations prioritized wealth creation
Our older generations (many of them first-generation earners in the strictest sense) prioritized safety and comfort above everything else which is quite natural. In fact it is thanks to their prudent outlook towards life that we are in a position to be a little more experimental with life or possess bigger desires in the first place (surely most second-generation or third-generation individuals will relate to this).
Older generations had an immense priority quite early in life- buying a house. As a result, they invested most of their earnings, even took loans and went through the entire repayment period in order to ensure future security for their children and family. Once this was out of the way, the older generation usually planned for retirement by investing in safer avenues like PPF, post-office FDs, regular Fixed Deposits (FDs), EPF and so on. Out of these, fixed deposits continue to be the most trusted product for senior citizens, many of whom derive almost their entire post-retirement income from FD investments.
How you should perceive FDs
Fixed Deposits (FDs) are definitely one of the safest ways you can invest and grow your money but you should consider one factor in this equation- inflation. Also, with the fall in interest rates owing to RBI repo rate cuts, deposit rates are also falling. This means that FD interest rates will not always outpace inflation. Rather, it will only be close to inflation rates. As a result, this is clearly not the only way of growing your wealth. The mantra is not to keep all your eggs in one basket these days. Diversification is the key.
You can perhaps allocate 15-20% of your earnings towards a Fixed Deposit which will come in handy for meeting future goals like emergency retirement money, children’s education and so on. The rest of your income should be invested in diverse avenues including equity/debt instruments (with adequate research and the right advice), insurance and of course, real estate.
Real estate investments can be smart moves for young earners
Wondering whether buying real estate will be a smart move, particularly if you’re young, earning well and shifting away from the perception of home ownership since you’ve already got a home (or even two) bequeathed to you by your parents? Well, you couldn’t be more wrong if you thought real estate investments were this risky and messy avenue. Real estate purchases can be smart moves if you do it right. If done right, they can yield fabulous wealth creation over the long haul.
The key here is to be patient. Markets go through fluctuations and upheavals at times. You have to be in it for the long term and in 10-15 years, your investment will start showing fruition since you will get excellent returns on what you invested. To put it simply, a friend took his own family home into context. In the year 2006, his father bought a 3 BHK apartment in a good locality in Kolkata for just Rs. 9 lakh by liquidating his provident fund savings prior to retirement. 13 years hence, property prices have jumped up in this prime location in South Kolkata and the resale property, although it has seen several years, is valued at Rs. 75 lakh. New properties in a similar category now command prices of Rs. 90 lakh-1 crore in the same locality. If you consider the return on investment, it is a whopping 800% and slightly more. The friend can easily sell off his property and buy another swanky one and he will have almost 75-80% of the new property cost in hand as a result. Hopefully this one example should suffice. Don’t put your entire investment allocation for real estate. You can keep about 40-50% and plan your budget accordingly.
Here’s what you should do:
- Invest in real estate as early as possible.
- Starter homes are good investments for wealth creation.
- You can consider investing in real estate for earning rental income. Once the EMIs are paid off, this income will be a major addition to the family kitty.
- The Government has also waived off taxation on assumption of rental income on a self-occupied second home.
- Tax deduction threshold has been raised to Rs. 2.4 lakh from Rs. 1.8 lakh on rental income.
- You can easily invest in an affordable/mid-income property and get the benefits of lower GST and tax savings at the same time (on principal and interest repayments).
- Some years down the line, when your starter home has appreciated handsomely, you can use it to keep earning steady rental income or use the proceeds from selling it to buy a larger and plusher apartment.
- You should do your research on the right locations, prices and historical returns in specific micro markets and consult industry professionals.
- Get the down payment sorted and also be in the loop about the home loan processes.
The take-away
FDs are good for achieving mid-term goals and safe wealth creation for a smaller part of your corpus. They will not help you beat inflation and seriously grow your net-worth. Investing a major part of the corpus in real estate will help you get good appreciation for the long haul and you can also earn rental income if you wish along with enjoying tax benefits on your home loan. Another witty friend put the entire thing in context- How do you think yesteryear Bollywood stars still manage to maintain the Audis and the costly outfits? It’s all property; early investments in property has kept them going. You think a 6-7% FD return would get them this much money? I truly have no choice but to raise a toast to that!
