The beginning of a new year is considered a great time to develop new habits that help you in the long run. While health-related new year resolutions are quite popular, we can add an additional dimension of financial health to make sure your wealth grows with desired acceleration. Wealth creation is a habit that you can inculcate but it needs a resolve and demands time. Here are some time-proven rules of wealth creation that you should add to your new year resolutions:
1. Lesser you borrow richer you become
By borrowing, essentially you consume tomorrow's savings today. The more you borrow the lesser savings you will have in future. Besides, borrowing comes at a cost (interest), which dents your savings capacity also. Taking a savings route is better because you earn returns on your savings and it grows with time. You can make a commitment to acquire most of the asset through disciplined savings. You will just have to wait a little and you can always acquire the desired assets with your savings. Borrowing should be the last resort and not a preferred option.
2. Make a budget to understand your finances
People generally depend upon their mental estimates to manage their expenses and investment. This random nature of managing finances lacks objectivity and clarity to decide right savings and investment amount. However, if you make a monthly budget by listing all your income and expenses for the entire year, it gives you concrete idea about your financial position. You know your correct saving capacity. Based on your life goals and saving requirement you can fine-tune your expenses.
3. Don't wait for tomorrow; it never comes
If you keep waiting for the right time to start your investments, it will never come. You will discover that every now and then new needs will come and money will get diverted. "The basic and most common mistake consumers make is living paycheck to paycheck, delaying their investments month after month, year after year. Every time you delay your investment for a later day, it comes with a significant opportunity cost. Creating wealth is all about financial discipline over the long term, and the earlier you start investing, the larger the corpus you are likely to accumulate, thanks to the power of compounding," says Naveen Kukreja- CEO and Co-Founder, Paisabazaar.com.
4. Go for goal-specific investment
Rather than random investment, you should link your investments to specific life goals. "Being aware of your financial goals enables investors to plan their investments according to their required corpus amount, time horizon and risk appetite. It also helps in better asset allocation as investments then can be planned based on the time horizon of those goals and your risk appetite. It is advised that for wealth creation, equity mutual funds should be the primary choice as they historically have provided superior returns than other instruments," says Kukreja.
5. Make equity a must in investment portfolio
Most life goals such as retirement, higher education of children and their marriage and a retirement house are of long-term in nature. When you have longer investment horizon on your side your risk appetite goes up. It enables you to invest in products that can give you higher returns. "It is advised that for wealth creation, equity mutual funds should be the primary choice as they historically have provided superior returns than other instruments," says Kukreja. Equity mutual funds have emerged as good avenues for laymen investors to invest in equities as funds are managed by experts. However, you should further diversify your investment to minimise the risk of concentration. "Investors should never put in their entire surplus in just one fund; instead, they should diversify by investing in schemes of multiple fund houses. This will ensure that in future if a particular scheme underperforms, your investments in other schemes will continue providing higher returns," suggests Kukreja.
6. Don't expect miracle, start with small steps
Most long-term life goals such as retirement and children's higher education may demand a big corpus that cannot be built in a short span of time. If you try to do that, you will end up taking unnecessary risk. So, you can start savings with small amount, but if you do it regularly, it can work wonders for you. "Since SIPs require regular investment, they ensure investors are disciplined. Investors, through SIPs, can also take advantage of rupee cost averaging, which means buying units at lower NAVs when markets fall," says Kukreja. Even by investing Rs 10,000 per month for next 20 years, you can build a corpus of Rs 67,274 if your equity fund gives you a return of 10 per cent per annum.
7. Avoid emotion-driven impulses
Equity market is known for its volatility with high growth and deep correction. It is normal for most investors to get swayed by such significant movements. However, if you invest for long-term you should keep yourself immune from these short-term movements. "Many of those who invest in equity mutual funds are often swayed by emotions of greed or fear. They start investing more during bull market conditions and redeem their investment when there are market corrections. The key is being rational and be disciplined in the long-term," says Kukreja.
8. Keep reserve funds for equity investment
If you are significantly away from your life goals such as five years or more, you can use the market correction to buy equities at a low cost. "During steep market corrections, investors should invest lumpsum amount in equity funds. This will enable investors to benefit from lower valuations and reach their target corpus faster with lower contributions," says Kukreja. However, you should avoid deploying all your reserves at one go and do it in tranches. If there is further correction, you use it to invest more.
Main Source - Businesstoday