Wealth creation involves three important aspects:-
• How much you should invest?
• Where you should invest? How much returns you will get?
• For how long you should invest?
All three aspects are equally important, if you understand the basic formula for wealth creation:-
Investment Value = Invested Amount X (1 + Return) Investment Tenure
If you are investing regularly through monthly SIP (or at any other interval e.g. weekly, fortnightly, quarterly etc) the same formula will apply for each SIP instalment. Let us now understand the individual components:-
1. Investment Value is the wealth your desire to create for your financial goals e.g. children’s higher education, children’s marriage, retirement planning, estate planning etc. Ideally should have wealth creation targets for each goal. The wealth that you create should fulfil all your aspirations for each of these goals in life. Inflation is an important factor in setting your wealth creation target because your inflation reduces the purchasing power of money. For example, if your wealth creation target is Rs 1 crore at today’s cost, your inflation adjusted target after 20 years should be Rs 2.7 crores (assuming 5% inflation).
2. Return is the capital appreciation or income, you expect from your investment. Return is the main difference between savings and investments. You should not just save; you should invest your savings to earn returns that will help you achieve your wealth creation target. Return on investment will depend on the asset class e.g. equity mutual funds, debt mutual funds etc or asset sub-category e.g. large cap funds, midcap funds, small cap funds etc. Different asset classes have different risk profiles. You should invest according to investment tenure and risk appetite. For long investment tenures equity is the preferred asset class.
3. Investment tenure is the timeframe by which you want to achieve your wealth creation target, if you started investing now. Investment tenure is a very important factor in wealth creation because it is directly related to the compounding effect. Compounding is interest earned on interest, or profit made on profits. The longer your investment tenure, higher in the power of compounding.
The wealth planner will tell you how much you need to save and invest every month to achieve your wealth creation goal. You can start saving and investing immediately in mutual funds through SIP to meet your wealth creation goal.