Raising a child is definitely one of the more responsible, yet rewarding experiences in life. As a parent, your priorities and responsibilities are bound to change over time. However, your eventual goal would be to secure the future of your child.
Won’t it be a great feeling if you’re able to gift Rs. 1 crore to your child on his/her 21st birthday?
For most of us, this might seem a herculean task (at present), but to tell you the truth, it’s definitely achievable!
‘Financial Discipline’ and ‘Time Horizon’ are the two main pillars of wealth creation. With a systematic approach, the power of compounding works wonders and over longer periods of time, it definitely helps you achieve your goal.
So, let’s discuss the six different ways that you can build wealth and gift your loved ones a better future:
Be it an obsession with the yellow metal or building up a cache of gold jewelry for your daughter’s marriage, gold is one of the most loved investment options for Indians. It’s the preferred route that helps you build a corpus of 1 crore over a period of time.
At an expected annual rate of 7-8% per annum, you’ll have to invest around Rs. 20000 per month that might fetch you a corpus of 1 crore over a time horizon of 20 years. In case you’re worried about the ‘unnecessary’ making charges or storage costs associated with gold, you can always invest in gold ETFs or purchase Sovereign Gold Bonds. This eliminates the risk of theft while allowing you to fulfill your dream.
When it comes to investing, Real Estate remains a ‘favored’ asset class among Indians. Some of us might have even heard our parents discussing their investments in properties. If you want to continue their legacy, now is your time!
To become a ‘crorepati’ - the real estate way, you’ll need to invest a lump sum of around 25-30 lakhs in a property that has better future prospects. With such an investment, even a reasonable 10% CAGR on your investment would value your property slightly more than 1 crore in only 15 years. In case you’re investing in a residential or a commercial space, property rentals would help you generate regular income, sparing you the maintenance costs associated with investments in real estate. And on your child’s 21st birthday, you can easily gift this property - tax-free!
In case you’re wondering about loans and EMIs, skip this option! For when you consider your real returns after deducting the interest cost, you might acquire a fortune that definitely comes at a cost.
By far one of the best investment options and a proven investment category, mutual funds have successfully delivered returns as high as 15%*, allowing investors to build wealth aggressively. Given the time frame of 15-20 years, you can easily skip the traditional asset classes (provided you have a moderate risk appetite). Give a chance to equity that can help you generate better returns.
Diversification is the key when it comes to investing in mutual funds. Accordingly, you should create a good mix in your portfolio. Ideally, your mutual fund portfolio should include a good mix: mid-cap, large-cap, diversified and debt funds. It balances the risk depending on your risk appetite. You can create a portfolio of say 65-70%* equity and 30-35%* of debt that might help you sail through turbulent times with ease.
The ‘Systematic Investment’ approach a.k.a. ‘SIP’ has rapidly grown as a preferred mode of investment. If you were to invest through the SIP mode, assuming a nominal 12% rate of returns on a conservative basis, not forgetting the recent 10% Long Term Capital Gains Tax, you may need to invest around Rs. 11,500/- per month to reach to your goal in 20 years. However, it’s advisable to increase your investment amount by 5-10%* per annum that will help you build a good corpus depending on your requirements.
This is a preferred way of investing among investors who fall in the ‘risk-averse’ category. Instruments such as PPF, Fixed Deposits, Post Office investments, NSC, Tax-Free bonds etc. could help you earn a steady fixed income ranging anywhere between 6-8%* on your investments. If you don’t have the appetite to take the risk, this is the best way you can create Rs. 1 crore by the time your child reaches the age of 21.
While in some of the investments, the interest earned is taxable, other instruments are entirely tax-free and your investment amount will depend on the investment category that you choose.
Assuming an average of 7% CAGR:
- At zero tax, you need to invest 20,000/- per month, whereas,
- At a tax rate of 30%, you’ll need to invest 25,000/- per month. This will help you build a corpus of Rs. 1 crore post-tax in a time frame of 20 years.
One of the most dependable options, endowment plans in insurance offers maturity benefit. Investments in insurance offer varied benefits including life cover, tax benefits u/s 80c and maturity benefits that help you build wealth over a given time frame.
However, such insurance plans are meant for risk coverage and not for wealth appropriation. Further, insurance plans offer very low returns of just 6-6.5%* per annum. Hence, they are not advisable as preferred investment options.
Direct investments in equity markets are recommended only if you have a good financial understanding and an eye for stock picking. If you’re an investor that understands different market cycles, know how to analyze companies’ financials, and are able to form a well-diversified portfolio that has a good mix of growth stocks, you can definitely invest in stocks to generate high returns from equity markets. However, if you’re new to the concept or have continuously failed while betting on stocks, it’s time you try mutual funds and make your money grow the professional way!
Now that we understand the importance of wealth creation, it’s time to act, formulate a strategy and start the good work of investing! While the investment options and strategies may differ among individuals, it’s important for you to give time to your investments and allow them to grow as wealth creation is an art and can only be mastered over time.