Ever heard of Chinese bamboo trees? Investments and Chinese bamboo trees have a lot in common. For the uninitiated, let’s talk about bamboo trees first. So, for almost 5 years, you keep watering the place where you have planted the seed of the Chinese bamboo regularly, but your eyes won’t be able to see anything growing out of the soil. After 5 years, the first sight of a small green bamboo coming out of the soil appears. And this bamboo, which came out of the soil after 5 years, grows to 80 feet in less than 90 days! Quite surprising, isn’t it?
The game of investing is also pretty much similar. It requires a lot of time and passion. If you leave midway, the trees won’t grow, and you will not be able to enjoy the fruits! To reach the finish line, it is necessary for you to remain in the game! This is the reason why long-term investing makes sense.
What about Compounding?
Investment returns, particularly that of equities, are non-linear in nature. There are years when nothing happens, and there are weeks where years happen! 80% of the returns accrue 20% of the time!
Hence, Albert Einstein rightly said, “Compounding is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it!”
So to enjoy some of the best days in the markets and to make compounding work, you have to remain invested for the long term to achieve financial success.
Investment Vehicles to Help You Achieve Financial Success
Mutual Funds
Simply put, a mutual fund is a collective investment vehicle where many individual investors come together to create a pool of money and hand it over to a professional fund manager who then manages the fund by charging management fees (which have numerous components) for the same. The fund manager allocates the money across a range of companies in different sectors according to the investing style of that particular mutual fund scheme. This allows individual investors to have the benefit of diversifying their money across various companies/sectors. The icing on the cake is that investments can be made with monthly contributions as small as Rs 500. Thus, many investors invest in mutual funds to create long-term wealth.
SIP in Stocks
It is a common notion that SIP investments work well only for mutual fund investments. It also works wonders when implemented for purchasing individual stocks. Investing in stock at different market levels will prevent you from feeling the pinch if you buy in a lump sum, and following that, the stock declines. Over time, this strategy can also help you in earning a reasonable passive income in the form of dividends.
Retirement Accounts
A retirement account is another long-term savings investment avenue that salaried individuals can use to their advantage to save for the future while simultaneously enjoying tax benefits. Salaried individuals can make additional contributions towards the ‘Voluntary Provident Fund’ in addition to EPF if the investment limit of Rs 1.5 lakh is not exhausted. Also, an employer’s contribution to NPS (subject to 10% of salary) will provide an additional deduction to the employee. This helps investors achieve one of their primary investment goals, i.e. savings for retirement!
Real Estate
The uniqueness of real estate as an asset class is that its value is appreciated most of the time. Hence, real estate is also an asset class that can be considered by investors to achieve inflation-beating long-term returns. Moreover, with the advent of Real Estate Investment Trusts (REITs), the requirement of a huge investment has also been done away with, as REITs allow investors to invest in rent-yielding real estate properties in small amounts.
However, one needs to be careful about the risks this asset class entails. A major risk with respect to physical real estate is that at the time of sale, it is difficult for the seller to realise the full market value, thus creating the problem of liquidity. This makes an investor asset-rich but cash poor! Other attributes, such as the location of the property, interest rates in the economy, etc., also need to be considered.
Conclusion
By now, you must have agreed that being invested for the long term while the compounding magic works in the background is the best combination to achieve pathbreaking financial success! To implement these, there are certain investment vehicles available out there, such as mutual funds, retirement accounts, real estate, etc. Pouring time and passion into your investments will test your patience. But one day, your money will surely grow like the height of the Chinese bamboo tree, and that is when you will achieve true financial freedom!
*The article is for information purposes only. This is not an investment advice.
*Disclaimer: Teji Mandi Disclaimer
