When people talk about diversification, normally it is from returns perspective. But, at the core of it is managing risk. We diversify because we want to make sure that price fluctuation in individual asset should not impact the overall portfolio. A perfectly diversified portfolio is one where we have inversely correlated assets, i.e. price of one asset grows if other falls and vice versa and on an average level in long term, we manage to generate good return at portfolio level, while managing the risk.

Portfolio Basics and the Need for Diversification

The concept of diversification applies even at single asset class category level too, like Equity. So, if you want to buy some stocks like a Fund Manager, there is a portfolio of stocks which needs to be constructed to ensure that the Equity portfolio is well diversified and we are able to get benefit of different businesses while also mitigating business risk. We will discuss Equity portfolio sometime else. For now, we focus on a wider portfolio consisting of different asset classes.

As you know, there are various asset classes. Typically, investors classify an asset based on its risk category. Risk is directly proportional to returns and hence the returns generated from the asset also depends on amount of risk.

There are different views on definition of risk. For the sake of simplicity, we will define volatility as risk. For example, if an asset price changes by 5-10% every day, it may be called risky because potentially one may make losses in such an asset. If another asset grows at a consistent pace and never falls, it is the least risk or zero risk because potentially there is never a loss. The risk of volatility can also be associated with liquidity or mismatch of demand/supply. When there is huge demand and not enough supply, you would see an asset price rise exponentially. Like, we see in bitcoin for example. Due to volatility, one may call it risky.

To summarize, we want to diversify to have risk adjusted returns which makes the entire portfolio grow consistently while managing risk at individual asset level.

Asset classes and the Risks associated

Lets look at different assets classified broadly based on risk for a diversified portfolio. The risk itself may be caused due to liquidity, credit default, market, business, macros and many other factors.

1. Fixed Rate Assets:

These are fixed income assets where the price appreciation is pre-decided. For example, Bank FDs, Government Bonds, Liquid funds etc. The important thing to understand here is Interest rate. You can understand Interest rate as the fixed price you get for sacrificing your present cash in hand. Money used today is always costlier than used tomorrow. If one wants to borrow it from me, I would demand an interest because I am sacrificing my present. Investors rent money today to gain interest for tomorrow.

Banks give away money as a loan to business as debt and in return, earn interest. As an investor, we deposit money in bank to earn interest. This is normally at a fixed rate based on the dynamics of a country and the central bank. Broadly, the rate is determined by inflation. That explains, why interest rates differ from one country to another.

This is an asset class with almost zero risk. I use the word ‘almost’ because there is always a risk of default in this class. We take sovereign guarantee as a word from God and believe, it will never default. But, we have seen banks default in the past and it can always happen. So, there is a minor risk which you take and that gets added to your return. Banks borrow money from RBI at certain rate and make profit on it. They also borrow from investors and pay them 1-2% higher return. This takes into account inflation and default risk. In Indian context, this returns range from 7-11% depending on the default risk involved.

If you lend it to some unsecured category individual, as some apps like Cred allow, you may get a little higher return. Some Corporate Funds may give you 11-12% return because of the extra risk taken.
Always remember, returns never come without risk. So, if you are getting 1-2% higher, remember the risk you are taking. Never buy the story of risk free return in a fixed income product unless it is a Bank FD or Government bonds. As the famous quote goes, ”In God we trust. All others must bring data.”

2. Gold

This is India’s favorite asset class. Everyone loves the yellow metal and tell stories of high returns it has given. Gold is an asset equivalent to Dollar and you can call it a global currency. Of course, there is a price change due to demand/supply. Normally, this is used by all central Governments to increase foreign reserve and there is always demand/supply mismatch for fixed amount of gold available on earth. Whenever there is a mismatch in demand/supply and there is depreciation of buying power of some currency, the gold price will appreciate. In Indian context, whenever you will see depreciation in value of rupee v/s dollar, gold prices will appreciate. Globally Gold price will appreciate depending on global demand and supply.

Based on the data available by Forbes India for past 25 years, Gold has grown at 11-12% per annum in rupee terms and has been a consistent compounder, helping individuals beat inflation largely and achieve returns better than Fixed income category. There is no liquidity risk in Gold as such since there is enough buying and selling options available. An investor can buy Gold in Physical or digital form via Mutual Funds. Government of India has discontinued fresh selling of Sovereign Gold bond. SGB was a good wealth creator for many in recent years because of it being a combination of asset price appreciation and also regular income. Some amount of Gold in your portfolio is good to keep it shining.

3. Real Estate

Land is another asset available to the world in limited quantity. The price appreciation here depends on demand supply and it is always a local phenomenon. For example, price appreciation in Pune may not be same as Indore, purely in percentage terms. Broadly, this also fits into 10-12% returns to an investor in very long term after taking different expenses into account. The real estate returns are tied to liquidity risk. The biggest risk for an investor is not being able to sell when you want. So, many would classify this as a ‘Use Asset’ for people and not really an investment because you simply buy a house and live there, effectively saving on the growing rental cost.

An individual should consider this as an asset in the diversified portfolio, purely from housing point of view. Getting return etc. will need solid knowledge of property and hence risky. Normal investors should stay away from investing in Real estate as commodity unless there is sufficient knowledge and liquid cash available.

4. Stocks or Equity for a Diversified Portfolio

A misunderstood Asset Class

Equity is a popular asset class with investors. The fact that you can check prices real time makes it an emotionally taxing asset. It requires some amount of financial literacy to make sense of value and price of underlying Assets. Financial world has always kept this as an enigma and the knowledge isn’t much democratized in this space.

Mostly investors just view it from the lens of prices. Business value is always volatile and hence considered risky. An individual should never consider owning stocks directly if they do not understand or do not have the bandwidth to understand.

Fundamentally, one must understand that the underlying asset in a stock price is a Corporate body. So, if you do not know the details of the business, you are taking a risk just based on price and it is not much different from betting in a casino. There are good fund Managers running Mutual Funds to help you own the stocks. An investor with limited bandwidth to understand business must go via Mutual funds and participate in wealth creation journey. This asset class fundamentally can generate much higher return than any other asset because of disproportionate risk involved in the assets.

Business risk and the risk Premium

The biggest risk in Equity is of business. Businesses do go bust, you know. So, the stock prices may come down to zero in such a case. As an investor, if I am taking that kind of risk, the returns expectation also should be higher. So, there is no reason for us to settle at low 10-12% range of returns in long term.

Most of the wealth creation around us is via business only. Either you create a business or own a business created by someone else. The success or failure of the business will depend on macro factors like state of economy, interest rates etc. But, the rewards are always going to be high. Several good Fund Managers have generated 15-20% and higher returns in long term. The key to success here is to think like a business owner and stay invested for a very long time.

Balancing Stocks, Bonds, and Other Assets – How to get a Diversified Portfolio

Now, that we understand the need for diversified portfolio, various asset classes available, lets understand how to diversify.

Debt Funds for Emergency Funds

A smart investor would keep fixed rate investment for emergency funds. Rest of the asset classes if you notice have liquidity risk, i.e. you may not find a buyer when you are in need of money immediately. This is where fixed rate investments are useful if they come with liquidity. PPF/EPF are not liquid assets due to long term lock-in. For emergency funds, one can consider Liquid Funds/FDs/Savings account. Typically, one should have at least 6 months of expense set aside as emergency fund. You may look for Debt-based Mutual Funds/Bank/Post Office or any other mechanism to park your money safely to withdraw on demand.

Liquid funds are not investment. They are just your risk mitigation plan. Do not look at generating high returns there at the cost of locking them up. Anything in the range of 6-8% is good enough. The main purpose here is not to grow money, but to mitigate risk of emergency.

PPF and Government Bonds

Once we have sufficient Emergency Funds, should you own PPF/Government bonds etc.? Once we have sufficient Emergency Funds, we can park money to generate higher risk-adjusted returns. Depending on your risk profile and understanding of asset, one should take risk. Remember, returns are proportionate to risk. So, no risk would also mean no return and hence inability to beat the inflation.

Debt Funds to Manage Risk

Asset allocation is never a straight approach and has diverse views. Broadly for <35 Age category, any money not needed in next 2 years can be exposed to higher risk to generate better returns. For older individuals, nature of job, dependents, short or mid-term goals will decide the risk profile. Allocate funds for near and mid-term goals. But, broadly an investor should look at generating highest possible risk-adjusted returns out of the funds available after we have taken care of Emergency needs and short to mid-term goals.

There is no rule of thumb here and one must get a risk profiling done to understand the level of diversification needed. Sometimes, there are short or medium term goals which need a different asset class. There are many who would suggest Balanced fund or 30:70 ratio for debt to equity ratio. But, it all depends on your risk profile and goal. A Financial Adviser can analyze your financial position in order to create a balanced portfolio of assets.

Adjusting Portfolio Based on Goals

A portfolio needs periodic review depending on market conditions. You will need to adjust the portfolio based on change in immediate goals or change in market conditions. For example, there are years when Equity may not give the expected level of return and optimizing the portfolio by switching some funds to debt or Gold may generate better returns. Multi-Asset Mutual Funds take care of this balancing and is good for peaceful investing technique. Alternatively, an individual can do this exercise. It is not easy to time the markets though and it needs expertise. So, it is advisable to go via Mutual Funds.

Final Thoughts on Diversified Portfolio

A diversified portfolio is key to peaceful investing. An ideal portfolio is where you don’t lose a night’s sleep. Money management should come with peace. Diversification is also a way to achieve peace because it ensures stability irrespective of market conditions. Look at different asset classes and based on your risk profile, allocate sufficient funds in each category. The portfolio needs adjustment based on goals. A Financial Adviser can guide you through the process. It is perfectly fine to manage it on your own if you are equipped with right knowledge. In this internet age, overflow of knowledge can make you confused and you end up making wrong decisions. Hence, consulting an financial expert is always good to ensure you are making a right choice.

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Wealth Creation is always a subject of experience. Same product may give different results to different people. For example, if we say a Mutual Fund has a CAGR of 15% in last 20 years, it doesn’t mean every investor made that 15%. Depending on the cycle and the time of entry/exit, every investor will have a different outcome. Hence, it is important to take a holistic look and seek professional guidance wherever you don’t have an answer.

While knowledge has become democratized due to internet, this can be a problem many times. Knowing and having the ability to create filtered knowledge is important. If you look up ‘You tube’ or any social media platform, there are 100s of videos, explaining Mutual funds. But, they cannot help you decide which one to invest in. Whether you should invest all in Mutual Funds or diversify? What is the ideal level of diversification? Should you buy gold or real estate? These questions appear simplistic. However, their solution is going to be complex because every individual will have a unique risk profile and unique goals.

Which category of individuals should reach out for Financial Planning or Advice?

There are different kinds of individuals depending on their income and wealth status and risk management profile. Broadly, they can be put into 3 categories:

1. Ultra Wealthy individuals:

Rich HNIs with sufficient money to take care of their present and also future of few generations. Do they need Financial Planning? Of course not. Their focus would be mainly on Investment Planning and multiplication of wealth is their prime focus.

2. Low-income Group:

There are people with income just enough to meet their expenses or literally in the hand to mouth category. Can Financial Planning help them? Certainly not. They should first focus on their income to meet their present cash flow. Once their present is secured, they can plan for future. These are the people working hard to take care of their physiological needs and lowest on Maslow’s hierarchy of Needs. Hence, Financial Planning is not really for them.

3. Mid-income group:

The mid-income category of individuals have surplus cash flow. They desire to utilize their resources effectively to reach a stage when today’s surplus can become tomorrow’s cash flow. This category of individuals can really benefit from right Financial Planning advise. They are generally resourceful individuals as far as their present cash flow is concerned. They are on the edge. They can either rise to 1st or fall into the 2nd category, depending on how they plan it from here. They are either the salaried middle class or upper middle class. They desire to break the chain and move up the ladder. A little professional help can help them achieve their milestones better and with confidence.

Transform Your Financial Planning With Professional Guidance

Financial Planning has some core steps involved before we can arrive at a concrete plan:

1. Understanding Cash Flow today.
2. Understanding the net worth or balance sheet.
3. Taking near term and emergency funds into account. Just talking about it can bring up lot of discipline with Cash Flow Management.
4. Understanding long term goals
5. Preparing for the days when cash flow is gone, i.e. Retirement.

A discussion on these details can be an eye opener for many. There are minor behavioral flaws due to family or neighborhood induced reasons. This can be corrected when you begin these discussions with an experienced Financial Planner. This discussion cannot be about get rich quickly. It is about making maximum out of the limited resources available. The solution can vary for different individuals and situations. It can involve “finding the right job or income.” It may include “cutting down on discretionary expenses.” Another potential solution is “finding the best instrument for investment.” There can be various other solutions. It all depends on the uniqueness of ones situation. This is not just about dealing with money, but also discussing behavior and psychology.

Conclusion:

Financial Planning is a well known concept in many countries and taken very seriously by individuals. However, in Indian context, it is similar to how we avoid going to a doctor and instead depend on self-medication. We try to solve problems based on advice from people around or source information from social Media. We may end up getting into mediocre or risky products without completely understanding how they are going to help. Hence, it is worth reaching out for professional help. This can help get things in your hand and be better prepared for the uncertain future. Are you prepared to sign up with a Financial Advisor? Feel free to reach out Fleek Finance Team to help us plan your better future.

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Investing for Beginners: A Step-by-Step Guide

As you see, humans are not designed for delaying the gratification. Most would want to have it today and immediately and sacrifice is a remote concept. If you do not sacrifice some part of your today to fund your tomorrow, you may have to continue to work forever to fund your lifestyle. The system is designed for you to work forever to earn your living.

A smart individual would learn delayed gratification to fund their future. Once you understand this concept well, you are ready to start your investing journey.

If this is difficult to practice, here are some basics you can try:

1. Force savings

There are disciplined approaches like SIP in Mutual Funds which are known wealth creators. Once you start earning, allocate some part of it for investment irrespective of your expense. So, Income-Savings= Expense instead of Income-Expense = Savings. This is a simple, yet powerful strategy which can help you increase your savings.

2. Avoid Complicating

Most individuals spend too much time thinking where to invest. The financial world is complicated by design to keep investors confused. It is your job to de-clutter it and think straight.

3. Do not over-diversify

Some are confused and not sure about any investment and end up over-diversifying. You don’t need to pick 10 different mutual funds. Just pick 1-3 good funds and more or less they will generate similar returns.

4. Track your expenses

Sometimes, people don’t know how much they are spending. You should have clarity of your income, expenses and your savings goal. One of the best investment strategies is to keep it documented. There are software available to help you with it.

5. Think before making discretionary expenses

Yes, you have a solid cash flow today and you can afford it. But, do you buy just because you can afford it? Think, if you are buying something because of a psychological pressure? Many times, it is FOMO or peer pressure which make us get into discretionary expenses. Avoid using your future cash flow to fund your present by taking a loan for any discretionary expense. Debt is a very bad trap and one should avoid getting into it at all cost.

6. Be open about money problems in family

Never hide your financial status with each other if you are married. As a family, if you brain storm investing, you may find a better approach towards it. Never hide your status with your spouse. If you are not doing well, call it out and reach out to each other for support with managing expenses. Many times, people do not tell the truth to their spouse and they don’t have a clarity on Financial challenges. In the end, you suffer as a family.

Why Start Investing Early

Warren Buffet is a great investor and has made lots of money in his life. Do you know he started investing as a teenager? He loved the art and mastered it. However, he managed to get big only in his early 50s. He is this big because he managed to live long. Most of us may not out-live him or become as great as him because of our limitation in terms of tenure of spending. If we do not start early, we are missing on the compounding factor.

To understand compounding, simply understand the ‘Rule of 72’. Money doubles every (72/rate of return) number of years. So, if you earn at 8% rate, you will double your money in 9 years and at 9%, it will be 8 years and so on. For you to start compounding your wealth, you should have a good base which you can compound. If you do not start early, chances are your wealth creation journey will get delayed.

So, you should start early to enjoy the compounding journey.

Low-Risk Strategies

One should always be prepared for emergency. Once you start your investing journey, you will realize that returns are proportional to risk taken. There are some emergency funds you should always have before you can move to risky strategies. This emergency fund should be invested in Low-Risk assets.

Some Low-Risk assets include Fixed deposits, Government Bonds, Liquid funds etc. there are various debt based Mutual Funds which are relatively low risk and useful. The low risk strategy should be deployed when you are trying to do a goal-based investment.

Let’s say, you want to enroll yourself for a course for which you will need some fund in 2 years. You cannot fund this via an Equity Mutual fund because you don’t know where the markets will be when you need the money in 2 years time. Hence, low-risk strategies are needed in such situation. Simply, look for an FD or a Debt based mutual fund which will ensure liquidity because you can sell it any time you like and also give you reasonable return with minimized risk.

So, depending on your goal, you will need Low-risk strategies also along with investment in high risk assets.

Building a Balanced Portfolio

This is not an easy game and you should talk to a Financial Adviser to get your portfolio reviewed. An overall assessment of your assets/liabilities and cash flow will help a Financial Adviser guide you in making right and balanced approach towards investment.

Investment strategies: Common Beginner Mistakes

1. Over-thinking. Investing is easy and simple. The financial media and influencers are responsible in making you think it is complex. A simple Mutual Fund which gives you 10-12% returns is enough. Just stay invested and do not think much about loss. Loss aversion is a key human trait which makes us risk-averse and eternally confused individuals. There is no risk in this world that is not worth taking. Just do it, chances are you will succeed. If you are cluttered, consult a Financial Adviser like you go to a doctor when you are suffering.

2. Insurance trap. Understand different insurance products and see what you need. A 25 year old with no dependents, does not need a term insurance. But, they do need a health insurance. Similarly, a 40 year old will need to make sure they have sufficient insurance for the entire family. These are minor mistakes which can create bigger problems for future while choosing your investment strategies. Also, do not buy endowment plans. Never mix insurance with investment. Keep them separate and simple.

3. Investing in Equity to meet short term goals: Equity is never a short term asset. Equity assets should ideally be never touch kind of money. But, people juggle with it to meet short term goals. For short term, look for low-risk debt funds.

4. Investing in stocks based on tips from Friends/Relatives: This is wastage of time and money. Unless you are seriously looking to understand stocks and investment, do not waste your time in this. Buy stocks via Mutual Funds. This will give you peace of mind along with wealth creation.

5. Delaying investing and increasing your expenses: Since, as a beginner the amount is low, you tend to think if it is of any value. All big things start small. Never stop small savings. Remember, you are delaying compounding if you delay investing. Make yourself a promise to increase your savings with every rise in salary. Generally, people focus on meeting short term goals and delay starting the investment plan. This is a dangerous trap and should be avoided at all costs.

Unless you realize the importance of investment in your life, you will never appreciate the strategies enough. So, it is crucial to know that the cash flow of today is sufficient to fund your today’s needs. But, tomorrow when it stops or a big expense comes for which your salary is not enough, you need to plan in advance. You need proper investment strategies which are based on data combined with research to achieve your goals, be it short-term or long-term.

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Understanding Prospect Theory: Risk Aversion and Risk Seeking

The Certainty of Profit

Consider this scenario:

You have two choices: a 100% chance to gain 500 rupees or a 50% chance to gain 1000 rupees.

Both options are profitable, but most people would choose the guaranteed 500 rupees. This is because we tend to be risk-averse when it comes to securing a profit. The thought process is, “Why take a risk when I can have a sure gain?” Prospect Theory explains that in profitable situations, we prefer certainty and avoid risk.

The Uncertainty of Loss

Now, let’s look at a different scenario:

You have a choice between a 100% chance to lose 500 rupees or a 50% chance to lose 1000 rupees.

This situation is trickier. When faced with a potential loss, we often become risk-seekers. We think, “Why accept a certain loss of 500 rupees? There’s a chance I might not lose anything if I take the risk.” This tendency to gamble in the face of certain loss is something we see in many aspects of life—whether in investments, relationships, or other decisions where the fear of loss drives us to take risks.

Conclusion: Embracing Rational Thinking for Better Decisions

Traditional economics would argue differently than behavioral economics. It suggests that it’s more logical to take a risk for a potential gain rather than to risk further loss. If humans were truly rational, we would prioritize maximizing profit over avoiding loss. However, our emotional responses often cloud our judgment. By delaying gratification, you might increase your chances of achieving greater profits. Similarly, when facing a loss, it might be wiser to accept it now rather than gamble and risk deeper losses.

Next time you’re tempted to lock in a quick profit, consider whether waiting could increase your gains. Or when confronted with a loss, think carefully about whether it’s worth taking a risk to avoid it or if it’s better to accept the loss and move on. By striving to think rationally, we can make better decisions as investors—and in life.

Some more real life examples:

1. You bought a ticket to a movie. 10 minutes gone and you realize, it’s a bad movie. Do you suffer through it or book your lost time?
2. People stuck in a bad relationship, anyone?
3. Anyone knows a friend who didn’t join that first job they had, instead went on to become a successful actor or changed career to take a chance? Or do you regret not taking a chance because there was a profit in sight?
4. What is your behavior when choosing term insurance? Premium is a certain loss. Most choose a mediocre LIC policy for a certain profit and avoid term insurance because they see premium as a certain loss.
5. Companies offer CTC. It’s a cost to company and employees love it. If they were to instead say, income to employee, may be they would know the reality, but love it less?
6. McD sells you that burger combo to make it look profitable for you. Consumers love small profit. There is another bias here at play. Will talk about it some other day!!

It’s a very powerful tool used all around us for marketing, product pricing.

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It’s a poignant reminder of how life and science can be intertwined, sometimes with unforeseen consequences.

How Industrial Revolution Shaped Our Corporate DNA

So, why am I talking about Mendel’s Pea Pods genetic legacy or rather genes today? Genes are the carriers of whatever is left in you from your ancestors. The Industrial Revolution led the world to adopt European ways of life, including the education system and job culture we see today—a legacy of our imperial past. This culture has made us great followers, with the Industrial Revolution teaching us to put our heads down, follow the rules, and live the life planned for us. This mindset is so ingrained that we hardly acknowledge the possibility of an alternative life where we buy back our time. An alternate world where we decide what to do with our time instead of renting it out for living. Could it be in our genes holding us back?

If you look at the corporate food chain, the employee is at the bottom, while investors are at the top. Employees are kept so busy throughout their lives that they often fall in love with this system, rarely dreaming of reaching the top of the food chain. It’s uncommon for a salaried individual to reach the top in one lifetime. But don’t genes evolve? We’re witnessing a wave of change in the newer generation of salaried professionals who are challenging the status quo. Companies like Byju’s, willing to fail, and Zomato, writing new success stories, exemplify this shift. However, evolving genetically within a single lifetime requires a significant push. As a society, we need to support those who are on this evolutionary path! We are risk averse by nature and that needs to change.

For every dream that came true, there was someone who said with conviction, it was possible. Genetic Legacy is all about taking risks because the biggest risk of life is not taking a risk!!

Happy evolution!!

The post The Genetic Legacy: From Mendel’s Pea Pods to Modern Corporate Evolution appeared first on Fleek Finance.

Real Estate vs. Stock Market: Which to Choose?

The sheer exposure of real estate in the human mind space makes it the go-to investment. However, my job is to present logic over unfounded opinions.

How Asset Prices Appreciate:

To understand the difference between real estate and equity, let’s first understand how asset prices appreciate. The basic demand-supply curve tells us that higher demand for an asset with limited supply leads to price appreciation.

Before we delve into details, let’s understand how we represent returns on an asset mathematically.

Returns = interest rate + inflation premium+ liquidity premium+ risk premium+ maturity premium

For example, FD and debt instruments have inflation premium along with RBI determined interest rate. As we will see further, real estate comes with liquidity premium, but limited risk premium.

Understanding Real Estate Investment: A Local Market

Real estate is a a local market. The demand is limited to local buyers or a few investors with stakes in the area. The price depends on local factors, including the extent of urbanization, development, and buyer affordability.

Mathematically, real estate returns can be described as:

Returns = interest rate + inflation premium + liquidity premium

Real estate typically has an inflation-adjusted return and a liquidity premium. The liquidity premium is derived from ease of sale. How easily you are able to buy or sell an asset will define liquidity. The biggest risk in Real estate is the risk of not being able to sell at a desired price, when you want to. This leads to price appreciation due to the liquidity risk. The real estate however, lacks a significant risk premium since it is generally less volatile. Risk premium comes with business risk which is more applicable in Stock Market.

Key Benefits of Stock Market Investment

Equity represents an investment in a business, inherently tied to the risks and uncertainties of that business. Unlike real estate, equity comes with a risk premium due to the volatility and unpredictability of business earnings. Additionally, the liquidity premium in equity is sometimes visible in markets where demand outpaces supply. Liquidity of assets determine the returns. Highly illiquid stocks tend to give better returns similar to high returns sometimes in real estate when the demand is on rise whereas inventory is limited.

Mathematically, equity returns can be described as:

Equity returns = interest rate + inflation premium + liquidity premium + risk premium

As you see, the returns in Equity has an element of liquidity and risk premium. This tends to give better returns most of the times, specially when the business risk is high. The risk premium is what gives equity an edge over other asset classes.

Risk Factors : Real Estate vs. Equity

Understanding the liquidity premium is crucial. In real estate, liquidity premium can turn negative if there’s no buyer for the asset you hold. There are many such stories!! In equity, small-cap stocks often give better returns due to their lower market cap and hence faster reaction to demand changes. Liquidity premium needs to be used to your advantage. It can become a risk if you have to do a distress sell.

Challenges for Equity Markets

Despite the logical advantages of equity, real estate often wins in opinion polls due to several challenges in equity markets:

Infrastructure: The ease of buying and selling in equity is a big disadvantage for wealth creation, leading to short-term holdings. There are limited stories of people holding Asian Paints or HDFC bank for decades, but lots of stories where your grand father bought a land and you are reaping it’s benefits!! Very few tell u that grand father didn’t sell because he couldn’t.

Leverage: Real estate benefits from loans, allowing for larger investments with less cash, unlike equity, which is mostly cash-based. With 10 lac of limited capital, you can dream of buying a 1 crore house with a leverage of 20-30 years at low interest rates!! Equity has no such option unless we want to bring intra day and derivatives in the argument.

Financial Literacy: Many people are unfamiliar with capital markets, reducing demand for equity investments. We have tough time explaining people on treating equity as an asset. It’s seen as a ticket to amusement park where you can buy low and sell high!! Because of this simplistic explanation, people don’t pay attention to details and avoid learning it too. Real estate is relatively easier to learn and the strong belief that it never goes down makes it more popular.

Conclusion: Real Estate vs. Equity

Equity has the potential for significant wealth generation if treated as a serious investment rather than a short-term gamble. Real estate may lag behind equity in returns, but it remains a popular choice due to familiarity and accessibility. However, when it comes to Real Estate vs. Equity and long-term wealth creation, equity holds the edge. This blog is not to argue against buying your dream house. Home obviously is not an investment in real terms, but only an emotional one. Having a house of your own is always a blessing and consider buying one if it’s within your reach.

Happy investing!!

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Can Mutual Funds Generate Wealth – The Importance of Building a Strong Financial Base

Wealth creation is often understood as the process of multiplying funds. For instance, at a 12% post-tax return, money doubles in 6 years and quadruples in 12 years. If you have ₹1 crore at 40, you could potentially have ₹4 crore by 52, securing your retirement. But what if you don’t have ₹1 crore at 40?

The Challenge of Lower Initial Savings

If your liquid net worth is ₹50 lakh at 40, you’d need 18% post-tax returns to reach ₹3 crore by 52—a tall order, but possible. The key is having a strong base amount. Without a substantial base at 40, salaried individuals may struggle with wealth creation. Business professionals, however, are often already on their journey to multiplying wealth.

The Risks and Realities for Salaried Individuals

At 40, many salaried individuals face risks due to technological shifts and a slowing economy. With higher expenses, such as children’s education and aging parents or enhanced lifestyles, saving rates may drop to 10-20% of income, despite increased salaries. This highlights the importance of discipline and the ability to save effectively at a younger age.

Focus on Saving, Not Just Multiplying

For young professionals, the focus should be on saving—adding to your funds—rather than solely on multiplying them. Chasing higher returns on small amounts can lead to unnecessary risks. Instead, reducing expenses and focusing on building a solid base is crucial. It’s about making smart choices, like giving up that iphone and opting for a more affordable phone, to manage risk and strengthen your financial foundation. Delaying gratification is a less understood virtue.

Note: This doesn’t mean, you should stop living. Of course, living life to the full is as important. Do pay attention to saving too. Ignoring saving for future is a bad plan. If you have a high salary and you can afford to buy an iPhone or travel abroad while ensuring a decent 30% savings, why not? Explore cheap thrills like making the best from credit cards points also!!

Where Do Mutual Funds Fit In?

Since you have read so far, we have established the need to have a strong base for wealth creation journey to begin!! For creating a strong base, mutual funds are an ideal investment for young investors. When returns aren’t as critical, mutual funds offer a safer and more reliable option than risky assets like Futures and Options (FnO). Doubling a small amount in FnO doesn’t compare to steady returns from mutual funds on a larger sum. If you’re seeking the thrill of high-risk investments, this advice might not be for you. However, for most young investors, focusing on stable growth is key. So, next time your friend tells you he or she doubled their money in FnO, ask them the amount they doubled. Nobody bets their entire wealth in Casino unless you have a maverick friend!! At young age, you should be fully invested in equity based mutual funds with no urge for that ‘Instant Gratification’.

Conclusion: Are You Ready to Build Your Strong Financial Base?

Mutual funds sahi hai for young investors looking to build a strong financial base. But are you ready to commit to the discipline and patience required to secure your financial future?

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