What gets you rich?

Most of the investors I have met in the last couple of months share a common goal - they want to get rich. While there could be various reasons for this quest for wealth creation, the desire remains the same.

Later, I will also cover a few of the investors we onboarded who were diametrically opposite. They were sorted in a very different way.

However, since most want an accretion in their wealth, how does one achieve this? Let me put it simply. There are three key determinants to wealth creation:

• Where do you invest
  
• How much of your capital do you invest in a particular asset/asset class
• Whether your behaviour aligns with the nature of the invested asset

Now, let's examine each of the determinants separately.

Where do you invest?
Clients have many investment choices, including direct investments or through various investment vehicles. The common investment choices are as follows:

• Equity: Stocks, mutual funds, PMS (portfolio management services), or AIF (alternative investment funds).
  
• Debt: Small savings schemes, fixed deposits, bonds, or debt mutual funds.
  
• Gold or commodities: Ornaments, physical coins, ETFs (exchange-traded funds), mutual funds, or sovereign gold bonds.
  
• Land/property: Residential or commercial properties, or through REITs (real estate investment trusts).

Each asset or asset class is intrinsically different, serves varied investment purposes, and behaves differently from each other. Investors in each of them need to understand the following aspects of the asset classes:

• Nature of the asset class
  
• Expected returns
  
• Volatility of returns
  
• Liquidity
  
• Optimum time horizon for investment
  
• Tax treatment on liquidation
  
• Systemic process and transparency
  
• Regulation
  
• Ease of doing business
  
• Minimum unit of investment

Although this list may not be exhaustive, it covers the important aspects.

How much of your capital do you invest in a particular asset/asset class?
When determining how much capital to invest in a specific asset or asset class, finding a balance between risk and reward is crucial. The strategic allocation of capital across different assets significantly influences the overall performance of an investment portfolio.

Diversification is a key principle in investment management, and it involves spreading your investments across various assets to reduce the impact of any single investment's performance. The idea behind diversification is that different assets may have different patterns of returns over time, and by holding a mix of assets, you could potentially achieve more stable and consistent returns.

That said, the allocation of capital should be based on individual risk tolerance, financial goals, investment time horizon, and the investor's overall financial situation. Younger investors with a longer investment horizon and greater risk tolerance may choose to have a higher allocation to equities, which historically have offered better returns but also come with higher volatility. On the other hand, investors nearing retirement or with lower risk tolerance may prefer a larger allocation to fixed-income assets like bonds, which are generally considered less risky but may offer lower returns.

We will learn the impact of asset allocation on your overall portfolio using an illustration in the next part of the trilogy.

Whether your behaviour aligns with the nature of the invested asset?
At last, we should match our requirements with the inherent traits of the investment option selected. This is extremely important for investors to stay invested throughout the journey of the product life cycle.

But when it comes to a few investors, they want the best of all the worlds. Some of the quirky expectations are:

• Returns of equity with no or low volatility.
  
• Equity returns with low drawdowns and quick recovery - just enough for them to invest that incremental amount.
  
• Debt investments with interest higher than FDs through venture debt with a written confirmation of no default.
  
• Products where we can defer or figure out a way to not pay taxes.

As an observer, I sometimes find it challenging to respond to such unrealistic expectations. In my mind, I want to say, "Are you kidding me?" However, outwardly, I maintain a smile and let the conversation pass. It reminds me of the unrealistic demands often seen in matrimonial ads, where people seek a perfect partner with a laundry list of contradictory qualities.

Get real, guys. The truth is you may get it all, but that is more of an exception than a rule.

Read the following parts:
Part II: Capital choreography
Part III: Equity is powerless without you

Shyamali has been navigating the asset management world for over 20 years, working with everyone from the seasoned super wealthy to absolute beginners. She has a knack for understanding the human side of investing and empathising with investors, something that shines through in her writing. She can be reached at [email protected]