What’s the secret to becoming rich? Most of us want a one-pointed answer to the question. Money is certainly not everything, but it’s important. Especially in these pandemic times, when jobs, incomes and careers have been ravaged. A good corpus helps us tide over such difficult times, help us repay our loans and meet our daily living expenses. We wonder what the rich have done to ensure stability and comfort in their money matters. What can we learn from them? And what is it that we shouldn’t be? Here is a special three-part series on what we can learn from the rich – the crorepatis, as we often refer to them colloquially, or high networth individuals in investment parlance. Today, let’s understand their typical investment habits.
Compounding: An investment term that means substantial growth of wealth over time. You would have heard it from your wealth advisor or read about it in every other investment literature. But many take it for granted. For instance, close to 34 percent equity assets are exited before a year. Although this was down from 43 percent in June 2015, a longer term analysis shows that not much has changed in terms of investor behaviour.
The rich know better, though. Financial advisors and distributors say that they understand ‘compounding’ better than the average investor. Here’s what you can learn from them, when it comes to building wealth for you and your family.
Don’t let money remain idle
Despite being wealthy, the rich don’t let money remain idle in their bank accounts. “Even if they get Rs 5 lakh – a relatively small amount for them – they, typically, won’t leave it dormant. The moment they get the cash, they invest,” says Sapna Narang, Managing Partner, Capital League. Narang says they are always on the lookout for investment opportunities. They may have a Rs 40 crore investment portfolio. But even if Rs 10 lakh worth of Public Provident Fund matures, she says the client would call and want to reinvest the proceeds, soon.
Back-of-the-envelope calculations show that if you start a systematic investment plan (Rs 1,000 a month) at age 23, you end up with a kitty of Rs 82.75 lakh when you retire at 60. A delay of just seven years sets you back by almost Rs 47 lakh. If you were to start at age 35, you will earn only about Rs 19 lakh; an amount that is Rs 63.77 lakh less than what you would have earned had you started early.
Willing to invest globally
Indian investors are increasingly opting for international funds over the past few years. But financial advisors who Moneycontrol spoke to say that rich investors have been investing in international funds for a long time, before they became widely popular.
Vishal Dhawan, founder CEO of Plan Ahead Wealth Advisors, points to a few triggers for why the rich warmed up to international funds early on. The rich aspire to send their kids abroad for further studies. But foreign education is costly. Besides, the Indian Rupee is a depreciating currency. For instance in 2013, one US dollar was worth Rs 55. Now, it is worth Rs 74.42. “Due to a depreciating currency (Indian Rupee), investing in international funds is a good way for financing your kid’s foreign education,” says Dhawan.
Despite being biased to investing in their own domestic markets, large or experienced global investors also deploy about 10-15 percent of their assets in emerging markets such as Indian and China. “The importance of diversification is, therefore, well understood,” he adds.
Talk to experts, seek help
“It’s a fallacy to assume that just because people are rich, they have knowledge of money management. They may be experts in their own fields, but many HNIs need the help of an advisor or a wealth management firm,” says Mrin Agarwal, Founder of Finsafe India.
The proliferation of direct plans and investment websites have nudged many millennials to take the direct route, without seeking financial advice. But if you cannot tell a good investment from a bad one, you don’t create wealth in the long run – you destroy it.
Narang narrates the tale of an old client who was an entrepreneur. As he was nearing his retirement age, he wanted to sell his company and retire. But the capital gains, at least on paper, were substantial as per his initial calculations. He worked with Narang and his chartered accountant for as long as six years, to execute a plan for reducing taxes substantially.
While there is much to learn from the rich, there are some aspects not worthy of emulation.
Focus on returns
Pune-based financial advisor Sujata Kabraji says that HNIs, often, have a strong desire for returns. “They don’t focus as much on risks or losses made,” she says. That’s not all. A senior wealth advisor, who did not wish to be named, said that HNIs at times only think about saving taxes, instead of focusing on wealth creation. For instance, unit-linked insurance plans used to be favourites with HNIs till recently because withdrawal proceeds used to be tax-free. ULIPs lock your money for at least five years and so may may not have been the best choice for some. Budget 2021 made proceeds from ULIPs taxable if the annual premium exceeded Rs 2.5 lakh.
Getting into exotic products
What do you do if your portfolio is already well-diversified with equity, debt and gold, apart from perhaps a few bank fixed deposits, a public provident fund account and possibly some non-convertible debentures? Typically, if you have more money to invest, you should largely top-up your existing investments.
Dhawan says that here’s where the rich investor gets it wrong. “There is a strong urge to try new and exotic investments,” he says. Aside from structured products such as market-linked debentures and perpetual bonds, Agarwal adds that, at present, there is a trend to invest in incubator funds that finance start-ups.
“Investing in start-ups may sound cool, but investors need to research well. You need the expertise of a corporate finance professional who can study and analyse balance sheets of start-up firms, project their cash levels, understand the businesses in which they work and project some sort of income, to make your investment worth the while,” says Agarwal.