Preservation of capital is as important as its appreciation
As we step into the New Year, here are 10 all-weather nuggets that have helped investors build and preserve wealth in the past and will continue to be the tenets for the future.
Earning money can be a routine task. Growing and preserving wealth, however, can be fairly challenging.
At the heart of lifelong growth and preservation of wealth is investing.
When you choose to invest your money, you give it an opportunity to grow and stay secure. The current investment landscape in India is very conducive for investors.
There are a host of investment products available that offer the potential to generate different rates of returns at varying levels of risk.
This gives investors an opportunity to create diversified portfolios and generate sufficient returns to meet their financial goals.
Seek financial advice
Investors must approach investing from a holistic perspective. For this, it is important that they understand their risk profiles and return requirements and create a strategy that will guide their decisions.
In order to create a robust strategy, individual investors should seek advice from experts. Wealth or financial advisors can help create a well-rounded policy statement that encompasses the individual’s risk-return requirements and lays out the investment mandate clearly.
Take advantage of tax laws
A common skill among the wealthy is their ability to take advantage of tax laws. All income, whether earned from work or through returns generated from investments, are usually subject to some amount of tax.
However, the tax laws in our country allow for certain concessions and deductions that can help investors minimise their overall tax liability. Considering that a rupee saved is a rupee earned, any amount of money that reduces your tax liability can be put to better use through investments.
Focus on wealth preservation
When we make investments, we usually focus on instruments that have the potential to generate superior returns.
But, preservation is equally, if not more, important as capital appreciation.
What this essentially means is that while individual investors should apportion a part of their capital to high-growth instruments, they must also invest a portion of their portfolio in stable, income-generating instruments.
The compounding benefits can create wonders here.
Diversify your portfolio
Investors must focus on creating diversified portfolios that are spread across asset classes and investment strategies.
Since different asset classes have different sources of risk and return, a well-diversified portfolio can ensure that adverse movements in any one asset class do not have a very large impact on portfolio returns. Through optimal diversification, investors can mitigate the overall portfolio risk and enhance risk-adjusted returns.
Know your credit and debt
Taking a home loan or using a credit card to purchase a television set is now very easy.
However, individuals must understand that the cost of credit can be very high, sometimes much higher than the rate of return on most of their investments.
Hence, it is imperative that investors pay heed to the amount of credit they use, and manage it judiciously.
Look out for good deals
Various investment instruments are available along the risk-return spectrum.
However, once in a while, investment opportunities come along that have the potential to generate superior future returns and are available at compelling valuations.
The savvy wealth creator will always keep her eyes peeled for such opportunities and will not hesitate to leverage the same.
Glean knowledge and info
Investing can be complicated and difficult for the lay investor.
This makes it imperative for investors to have a basic understanding of the investment climate around them and be acquainted with the multiple investment opportunities available to them.
Even for those investors opting to seek professional advice, a basic understanding of investments and the prevailing economic and investment landscape can be value-accretive.
Multiple sources of income
It is important for individuals to create multiple sources of income.
This creates a natural hedge in their portfolio. The main source of income for most individuals is business or corporate employment. Individuals also earn returns generated from their investments, which they can re-invest.
Additionally, individuals can also consider pet projects or part-time projects that can create another income flow.
Focus on the long term
When it comes to investing in equities, a long-term holding period is likely to hold investors in good stead. There are two primary benefits of long-term investing.
One, it helps mitigate the overall portfolio volatility as it smoothens out the short-term volatility in asset prices. Two, it allows investment returns to witness exponential growth through the power of compounding.
Generating and preserving wealth is not a one-time exercise. Instead, it is a habit that needs to be inculcated and honed through one’s lifetime.
Happy investing and happy New Year.
The author is Shaji Kumar Devakar, Senior Managing Partner, IIFL Wealth Management