If you look at the dictionary meaning of wealth, it is abundance. When you talk about wealth with respect to money it means an abundance of money and wealth creation focuses on making this abundance a reality. For you and me, wealth can be defined as the sum total of assets we own, be it real estate, cash, gold, stocks, mutual fund units, etc. after deducting any liabilities such as outstanding loans.
But wealth is also a relative term. Whether an individual is wealthy or not depends on the benchmark we set for ourselves based on our dreams. So, you may call yourself wealthy if you have enough to fulfill all your dreams. For example, you might dream of owning an apple orchard in Shimla or a 4-BHK flat in South Delhi. Achieving these dreams would require a substantial amount of wealth. So, if you don’t have enough wealth to fulfill these dreams, you have to focus on growing your wealth, to get closer to achieving your financial goals or dreams.
In this blog, we will discuss whatwealth creationactually means, its importance, and some strategies that can help in the successful creation of wealth.
What Is Wealth Creation?
One cannot create wealth by just earning more money. You have to invest your savings to create a parallel stream of income. This process of investing your saved money to grow your wealth by choosing investments that align with your financial goals is called wealth creation.
For sufficient wealth creation, apart from choosing the right investment, you also have to give your investments sufficient time to grow. You need to maximize the benefit of compounding by investing as early in life as possible. Early starters have the opportunity to stay invested longer, which makes it easier for them to reach various financial goals.
Another way to ensure you achieve your wealth creation goal is to increase your investments in line with the increase in your income. If you are a salaried person, you would get an annual increment. If you increase your monthly investments by the same proportion as your annual increment every year, you will be able to save significantly more. After all,how much you invest matters more than your returnsespecially when you are starting your investment journey.
As the type of goal and time horizon varies from one individual to another, there is no single guaranteed way to create wealth. For example, if you are investing for the long term, equity-oriented investments are more suitable as compared to Debt-oriented investments. On the other hand, Debt and Hybrid Mutual Funds are more suitable for short and medium-term investment goals.
What Is The Objective Of Wealth Creation?
The importance ofwealth creationcan be summed up by a statement made by legendary investor Warren Buffet – “If you don’t find a way to make money while you sleep, you will have to work till you die”. What he meant by this statement is that one of the key objectives of wealth creation is the ability to generate wealth passively by investing money that has been earned previously. This way savings grow over time and add to the wealth of the investor.
At the most basic level,wealth creationis just about growing your money to achieve various short, medium, and long-term financial goals. Short-term financial goals could mean saving enough money for a vacation or to buy the latest iPhone. These are typically goals that need to be achieved within a period of 3 years or less.
Medium-term goals are usually investment goals that have to be achieved within a period of 3 to 5 years. Examples of suchwealth creation goalscan include saving for a new car, saving for the down payment for a new house, etc.
On the other hand, long-term goals such as ensuring sufficient retirement savings can easily have an investment horizon that extends into multiple years and even decades. In this case, you need to ensure that you create enough wealth during your working life to support your post-retirement financial needs.
Now as there can be multiple objectives of wealth creation along with different time horizons, you have to implement different strategies to achieve such varied goals.
How To Choose The Right Investment For Creating Wealth
As an investor, you might have access to a variety of investment options. But just as each tool in a toolbox is suitable for a specific task, the same is also true for investments. For example, if you are saving for a financial goal that you need to reach within 6 months, you have to prioritize the safety of the amount invested over the potential returns you might get from the investment. That’s why low-volatility options like Liquid Funds and Fixed Deposits are thebest investments for short-term investment goals.
But even though the safety of your investments is important, you have to prioritize growth of your investment to achieve long-term financial goals. A common instance of this mistake is opting for fixed return investments such as Fixed Deposits (FDs) over Equity-oriented investments such as Flexicap Funds when saving for long-term goals like retirement or a dream house.
To understand how people err on this side let’s consider an example. Suppose, you have calculated that you need Rs. 4 crore to save for your dream house and you have 20 years to achieve this goal. At present, the annual interest rates from FDs are around 6%. On the other hand, over the past 15 years, Flexicap Funds have provided average annual returns of around 12%. Assuming, that the average annual returns from these investments will be maintained for the next 20 years, the below table shows the monthly investment you will need to reach your financial goal:
| Monthly Investment Required to Save Rs. 4 crore in 20 Years | ||
| Fixed Deposit | Flexicap Funds | |
| Average Annual Return/ Interest Rate (p.a.) | 6%. | 12% |
| Investment Period | 20 years | 20 years |
| Monthly Investment Required | Rs. 86,150 | Rs. 40,035 |
As you can see, if you only depend on FD to reach your goal, you will need to save Rs. 86,150 every month for the next 20 years and this will be a tough task. Whereas, if you invest in Flexicap Funds, your investment requirement will be reduced to a much more achievable Rs. 40,035 per month.
So, in this scenario, the FD is not a suitable tool for achieving the long-term financial goal even though its returns will remain consistent throughout the investment tenure. As a result, if you try to use only fixed return instruments for wealth creation over the long term, it will need considerably more effort on your part. This is why you need to choose the appropriate investment option based on your specific wealth creation goal.
How Can You Achieve Your Wealth Creation Goals
At any given time, you might be working towards achieving multiple financial goals. Not all of these will be long-term goals like retirement. You might need to reach some goals like saving for a new car or downpayment for a new house much sooner. Depending on how near or far in the future a particular goal is, your risk-taking ability for different goals will vary. As a result, you cannot rely on a single investment strategy to ensure that you stay on track to achieve all of these goals. So, you will need to implement different wealth creation strategies that are customized to each financial goal.
ET Money Geniusmembership allows you to select from 6 customized implement investment strategies that are best suited to achieve various financial goals with ease. As a Genius member, you no longer have to manually select individual investments or figure out how to rebalance your investments periodically to generate optimal risk-adjusted returns.
Based on the portfolio strategy you choose, your investments would comprise a basket of Index, Gold, and Debt Funds or stocks and ETFs that diversify your investments across domestic Equity, Debt, International Equity, and Gold. The optimal allocation of your investment portfolio will be automatically determined by ET Money Genius algorithm based on your wealth creation goal. This way you no longer have to put in any time or effort to choose investments and determine the ideal asset allocation mix to reach your wealth creation goal.
Since your portfolio allocation to different asset classes cannot remain static, the Genius algorithm will use dynamic and strategic asset allocation strategies to time your entry into and exit from different investments through one-tap monthly rebalancing. The periodic change to your investment portfolio depending on different market conditions will ensure you are ideally placed to generate optimal returns while controlling the potential downside during market drawdowns.
Bottom Line
Wealth creation is a continuous process. You need to make a plan and stick to it so that you can meet all your goals. Plus there is no one-size-fits-all wealth creation solution as each individual has unique goals, risk tolerance, etc. So, choosing the right investment that can help you achieve your goals plays a key role in ensuring you succeed in creating wealth over time.
We hope you found this article useful. If you did, please share it with your friends and family and help us reach more people. If you have any questions or you need clarification on what we have written in this blog, do ask us in the comment section below, and we will respond.
