Here, we delve into strategies for an individual to allocate their income effectively, aiming to build a passive source of income and foster wealth growth over time. A key principle to always remember is: "Never put all your eggs in one basket." Diversification is crucial to safeguard your investments against market volatility and economic downturns.
For instance, while certain securities or asset classes may yield significant returns temporarily, relying solely on them can be risky. Take the stock market as an example: over the past 3–4 years, it delivered an impressive CAGR of 30%. However, in recent times, it has declined by 15%, with potential for further deterioration. Investors who committed their entire savings to mutual funds or stocks during the market's peak are now facing significant stress.
To avoid such scenarios, it’s essential to spread your investments across multiple avenues. Below, we’ll discuss the types of investments one should prioritize when starting their financial journey, emphasizing the order of importance for sustainable wealth creation and financial security:
Life Insurance:
The first and most crucial investment to make when you start earning is life insurance. It ensures financial security for your family in the unfortunate event of your absence. Life insurance comes in two main types: Term Insurance and Traditional Insurance. My advice is to prioritize getting a Term Insurance policy first, as it offers high coverage at a low cost. Once that’s in place, you can explore Traditional Insurance policies if they align with your financial goals.
Health Insurance:
In India, unlike in many developed countries, paying taxes does not guarantee health coverage. A serious illness or medical emergency, whether for you or a family member, can drain your entire savings. To safeguard your financial stability and protect your wealth from being eroded by unexpected medical expenses, investing in a comprehensive health insurance policy is essential. It acts as a financial shield during critical health crises, ensuring you’re prepared for unforeseen medical costs.
After securing life and health insurance, the remaining funds should be allocated across the following investment options, tailored to the individual's risk appetite and financial goals.
Fixed income investments:
For individuals with a low tolerance for risk, there are several safe and reliable investment options to consider. These include Fixed Deposits (FDs), Government Bonds, Public Provident Fund (PPF), Corporate Bonds, and Peer-to-Peer (P2P) Lending.
These options collectively provide returns in the range of 7–9% per annum, making them a solid choice for wealth preservation and moderate growth.
Mutual funds:
Over the past few years (2021–2025), mutual funds have become a highly popular investment option. Individuals can choose to invest in mutual funds either through Systematic Investment Plans (SIPs) on a monthly basis or via a lump sum investment. These funds have the potential to deliver annual returns ranging from 9–15%.
However, it is important to note that mutual funds are subject to market risks, and returns can occasionally turn negative depending on market conditions. Therefore, it’s essential to assess your risk appetite and investment horizon before investing.
Equity Market Investments:
For those with a higher risk tolerance and a willingness to conduct thorough research, investing in the equity market can be a lucrative option. By carefully selecting growth stocks—companies with strong potential for long-term value appreciation—individuals can aim for significant returns over time.
Expected returns from equity investments typically range from 15–30% per annum, though outcomes can vary widely based on market conditions and stock selection. It's important to note that returns may occasionally exceed 30% during favourable market cycles or, conversely, dip into negative territory during downturns. Proper research and a disciplined approach are critical for success in this space.
Commodities (Gold/ Silver)
As a traditional and reliable option, individuals can invest in gold, silver, or other commodities to hedge their portfolio against market downturns or currency depreciation. These investments act as a safeguard, offering stability during volatile market conditions.
Returns from commodities typically range between 5–12% per annum, depending on market dynamics. Investments can be made in the form of physical commodities (like gold bars, coins, or silver) or through Exchange-Traded Funds (ETFs), which provide a more convenient and liquid way to gain exposure to these assets.
All the options mentioned above can be invested in with a small ticket size. However, the investments discussed below typically require larger allocations, making them suitable for those with a higher ticket size:
Real estates:
Investments in real estate can include land, residential properties, or commercial properties such as warehouses or corporate offices. However, real estate investments tend to be illiquid, meaning the capital is tied up and not easily accessible. The expected return on real estate investments typically ranges from 7–15% per annum, depending on market conditions and location.
Venture capital / Startup funding:
Investing in growing businesses, either directly or through venture capital firms, can offer high potential rewards. However, this comes with a significantly higher level of risk. The potential for returns is substantial, typically ranging from 30-50% per annum, but the investment horizon should be long-term, with a holding period of 7–10 years or more. This type of investment is best suited for those who are willing to take on higher risks for the possibility of substantial gains over time.
Miscellaneous Investment Options:
In addition to the traditional investment avenues, there are other options such as PMS, AIF invoice discounting, Infrastructure Investment Trusts (INVITs), Real Estate Investment Trusts (REITs), and other niche investment opportunities that can diversify a portfolio. These alternatives can provide unique benefits, but they require careful consideration.
The list provided above is merely illustrative, and each of these investment types needs to be thoroughly evaluated before committing any capital. It's essential to consider factors such as the investment's risk profile, time horizon, and liquidity before making any decisions.
Allocating funds across various assets should be done in line with your individual risk tolerance and financial goals. Over time, it’s important to regularly review and adjust your portfolio to ensure it remains aligned with your evolving needs.
For a more tailored approach and to navigate these complex options, it’s highly recommended to consult with a financial advisor who can provide personalized guidance and strategies for building a balanced and effective investment portfolio.
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- Oscar Wilde
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CA Umang Jain
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