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Business News/ Money / Personal Finance/  From dreaming to doing: How smart investing turns aspirations into achievements

From dreaming to doing: How smart investing turns aspirations into achievements

Saving is crucial, but investing smart is key to wealth creation. Google search data shows a rise in interest in managing finances during uncertain times. Investing in assets like stocks can outpace inflation and yield higher returns than savings accounts.

Investing early and wisely is essential for wealth creation. Premium
Investing early and wisely is essential for wealth creation.

Saving is undoubtedly the first step to building wealth. However, your savings alone cannot fulfil your dreams of travelling around the world or owning a home in your favourite locality. You must make your money work harder for you – hard enough to ensure that your wealth grows at a faster pace than inflation. And this is exactly what investing smart is all about.

Be money-smart

Google search data indicates that queries about navigating uncertain financial times while being able to enjoy the little luxuries of life have significantly increased since the pandemic. On the one hand, people realise that their time on this earth is limited, and on the other, they recognize the importance of having the means to spend comfortably. This is why wealth creation trumps savings today.

Consider the Nifty 50, India’s benchmark stock index. It has appreciated over 89% in the past 5 years. When considered for 30 years, from 1993 to 2022, most investment classes have outpaced inflation, which averaged 2.5%. For instance, mid-cap stocks yielded returns of 11.07%, large-caps 9.6% and small-caps 8.5%. On the other hand, cash in a savings account only returned 2.3%.

Smart investing outpaces inflation

The foremost thing to do with your income is to create an emergency fund. Once sufficient liquidity is built for rainy days, you can look beyond the peace of mind of having “enough."

In India, return rates on savings accounts or bank deposits range from 2% to 7% in the short term. However, returns from the financial markets have averaged around 12% in the 5 years from 2018 to 2023.

What does investing smart mean?

The three pillars of investing smart are:

Build wealth harnessing the power of compounding: The best thing about investments is that you can start small, with whatever capital your income and expenses allow. But you need to give your money time to grow. So, you should start as early as you can. For instance, by investing 30,000 every month in an index fund with a 12% return, one can build over 48 lakhs in 8 years. Even if the timeframe is 5 years, compounding will give returns of about 24 lakhs.

Compounding means that interest payments are added to the principal investment, such that each successive interest payment is on a larger and larger principal. This leads your investment to grow exponentially. This simple mechanism forms the basis of early retirement plans for seasoned investors.

Navigate market uncertainties with diversification: Diversification helps you hedge against market risks. Inversely correlated instruments translate into a portfolio that has a high potential to remain positive. It is as simple as understanding the relationship between temperature and sales of hot chocolate. The lower the temperature, the higher the sales.

Similarly, recognizing inversely correlated markets and efficiently creating a strategy based on this has a significant impact on portfolio performance. However, there needs to be a balance to avoid over or under-hedging.

Start by defining your financial goals and risk appetite: To begin investing, define your financial goals. This will help you create a progress roadmap. Use this plan to create an investment strategy and measure your progress. It must account for your risk appetite. As one goes through life and liabilities increase, risk appetite changes. Assessing and refining your investment plan accordingly with stringent risk management measures is key.

Robert Kiyosaki, the author of the famous book Rich Dad Poor Dad, says, “It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for."

The younger generations are becoming increasingly financially aware. They need the right education and tools to take advantage of the financial markets. The goal should be to arm investors with cutting-edge technology tools to capitalise on market opportunities. ClienTech-led organisations can enable them to deliver customer-centric investment opportunities to every individual.

Gaurav Garg, AD - Head of Digital Business & Customer Experience at blinkX by JM Financial 


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Published: 17 Apr 2024, 01:56 PM IST
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