Wealth creation - Part 3 - Where to Invest?

Welcome to part 3 of the blog series ‘Want to create wealth. But how’

In part 2, Prakash shared with us powerful mantras of wealth creation.

They are:

(a)   Understanding our risk appetite

(b)   Asset allocation basis our risk appetite

(c)   Importance of having financial goals.

Here is a link to Part 2 of the blog:

https://www.blogger.com/blogger.g?blogID=2249881988584882575#editor/target=post;postID=7051872362494185605;onPublishedMenu=posts;onClosedMenu=posts;postNum=1;src=postname

Shraddha asked Prakash the following questions.

How do I know which asset class should I invest in?

How about returns?

How about guarantee?

All of us had these questions in our mind. Most of us were aware of the different asset classes (at least by name) but Prakash showed us the slide to give a comprehensive understanding of different asset classes.

The group could relate to some of the names like real estate, cash etc. Some in the group were partially aware of commodities; collector’s items; fixed income and equities.

Prakash told the group not to get confused with the blocks. The important point he said is to know that each asset class comes with its own risk and rewards.

Do you mean higher risk, higher returns and lower risk, lower returns? asked Deepak.

Yes. You are right Deepak. This becomes an important consideration while planning your financial objectives, said Prakash.

He continued looking at the group. 'FDs and RDs form a part of fixed income assets. They give you assured returns but the returns are fixed at a certain percentage. They cannot go beyond that. Currently they are anywhere between 7.5 to 8.5 percent. The average inflation from 2004 to 2014 stands at 8.14%. This clearly shows that this investment option cannot help you beat inflation'. 

'But these are guaranteed' said Shraddhha. Yes. That’s correct. And that gives lot of comfort to all of us, right? asked Prakash. All of us nodded our heads. After long time he was talking what we wanted to hear. He also highlighted the tax related benefits for some guaranteed returns products like PPF (Public Provident Fund) and NSC (National Savings Certificate)

'However what I am going to tell you now is equally important' asserted Prakash. 

‘How many of you have heard of Unit Scheme 64 (US 64)’?

90% hands went up. After all US 64 was a long standing scheme of UTI.  People perceived this scheme to be an assured return scheme. They had every reason to think that way. The scheme religiously declared dividends every year similar to any assured returns scheme. This scheme missed giving dividends in 2001 stating shortfall in assets.

Some from the group recalled this information which they had read in the newspaper during those days. For some of us this was a news.

The point I am making said Prakash is this.

Number of assured returns options/financial products are coming down. Assured return schemes always do not give assured returns and sometimes even your principal amount also may be at stake. Prakash gave example of few NBFC (Non-banking financial company) to substantiate his point. They promised handsome guaranteed returns but did not give even the principal amount of the investors.

By now Shraddha seemed to have moved from her fixation to assured returns products.

'So Prakash are you suggesting that in addition to assured return products we should start investing in other things mentioned on the slide' asked Shraddha.

Yes. Certainly. Investing your money in different asset classes’ basis your risk appetite is called Asset Allocation. This is the best way to create wealth. And this means that you need to invest your money in Equities as well.

‘But equity is a risky asset class’ said Ashok. Others echoed.

Prakash gave a smile as if he knew something on equities that we don’t.

However since we were already over 90 minutes in this discussion, someone said that we should break away and reconvene the next weekend to discuss things further.

Prakash and the group agreed. He highlighted the following three points before we dispersed.

1.     1. Assured returns schemes/financial products have their benefits however number of such schemes has come    down over last few years.

2.   2.  Assured return schemes always do not give assured returns and sometimes even your principal amount also   may be at stake.

3.    3.  One must invest in equities if he/she is serious about wealth creation.

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