‘Invest to create long-term wealth’

Wealth creation is a common goal pursued by every individual. To create long-term wealth, it is important for every individual to invest, and not just save. Thus, the difference between savings and investment needs to be understood by everyone, especially youngsters, as investing always involves a certain risk, unlike savings, said Anil Chopra, Group CEO & Director, Bajaj Capital Ltd.

He was delivering the BL Club lecture at IMT, Ghaziabad.

However, this risk can be reduced, managed, mitigated or minimised by following certain strategies which are discussed below.

Asset classes

To create wealth by investing, there are six types of avenues or asset classes in which an investor can park his/ her savings — Debt, Equity, Gold, Real Estate, Commodities and Art. Out of these six asset classes, investing via commodities and art is still not popular in India. But the other four avenues are common, said Chopra.

To explain this in a better way, let us discuss how one should one divide his/ her savings of Rs 100 into each one of these four different asset classes to achieve one’s long-term goals. Debt, which includes bank deposits, all post office schemes, bonds and debentures, is the most popular investment option, but it does not pass the test of wealth creation because at best, it only meets inflation and does not help one create wealth (if you calculate the real return which is after taxes and after reducing the inflation).

However, at the same time, we are not suggesting that no amount should be invested in the debt instruments.

He said equity, the other asset class, has always delivered superior returns over the years compared to others. But since equity is associated with inherent risks due to the volatile markets, one needs to be very disciplined to invest through this route. It requires thorough research and one needs to have a lot of patience — only then one can generate wealth by investing part of the savings into equity. In the case of gold, the thumb rule is that only about 10 per cent of your financial savings should be put into the commodity, since it does not help anyone create wealth, but only protects it and catches up with the inflation.

Real estate, too, is a good wealth creator, but not for everyone, because it needs large amounts to begin with.

Thus, to sum up, in order to create wealth, it is important to divide one’s savings into equity, debt and gold.