Investors' Hangout: Your wealth builder plan

What do you think should be the first step towards the plan to create wealth?
The first thing to create wealth around Diwali and all the sales going on, and everybody luring you into buying something or spending your money, I think it is about time to just remind ourselves what Diwali is. So, learn what Diwali is, and in our very traditional way, we basically work towards cleaning our house, making it very welcoming for Lakshmi to come, which is our goddess of prosperity. So remember that it is not about spending - making sure that you have a tidy clean home where she will be welcomed. That's one.

Second thing is if it is about prosperity, then I will remind you about all the boring things that we keep saying year after year, month after month, week after week, including in Investors' Hangout, that five-seven things to do and two-three things to never do. Which is don't spend that you don't need to, and that is the first step. But before that, the most important thing is that everybody starts investing, after you have spent money, your leftover money. How about first investing, and then thinking that okay, I will spend whatever is leftover. If you just do this, things will change. So paying yourself, keeping that money aside, because that is something which will ensure that you will have many, many happy Diwali, not just now.

The next step is knowing if you're able to do that. But that requires little work in terms of broadly estimating how much you're likely to need. Planning your expenses, planning your expenditure will be very useful, because many times I think that everybody is thinking that, okay, whatever they have earned, it is primarily to spend. And so if you plan for things, because where are you going to spend, that itself will bring about a degree of consciousness about what not to spend on? Because many times you realise that, okay, you're spending so much every month, but if you just go every day as a new day, then you will not realise just that you earn, you got your salary on 1st and by 25th, it's all over and you will not have a breakup that how much was spent on what. So can you really do some kind of budgeting? Can you really prioritise things? Can you really proportionate something on something which may not be needed?

Then the other boring thing which we keep repeating is that building the foundation, which is having your insurance, having your emergency fund and having the life insurance and health insurance, because if you fall sick, all your investment plans go haywire.

And likewise, if you're young, if you have dependents, and if you disappear tomorrow, there is absolutely nothing for anybody to fall back on. And that is the age when the term insurance, the real life insurance costs very little. So if you're really bothered about your dependents, your financial dependents and you should be, then better prepared for it.

Talking about insurance, what's your view on ULIPs?
No, don't mix it because you need to be very objective. This is something where most of us commit to insurance linked investment, which is neither a good investment nor a good insurance.

So the moment you mix it, you don't really know how to objectively measure it. So go for a term insurance - that's the only real insurance which people need.

Talking about Diwali, it's also the time when people buy gold because they think that this is the time to buy gold and it's auspicious and whatnot. So do you think gold is a good investment?
Gold is not a good investment, but I have been wrong in the last 10-15 years. Last five years, gold has been fairly rewarding. Last 15 years, gold has been very rewarding. In fact, the good time for gold started sometime in 2007. But I still have a very deep rooted belief that gold is not a great investment. The gold appreciation entirely depends on larger demand, higher demand at a future date. If less people fancy gold at a future date, gold will definitely go down in price. Because the entire dependence of gold appreciation is on more people liking it, more people having prosperity and also willing to have it.

And also gold is able to preserve its value which is good. It is not expected or not supposed to beat inflation and it has no variables why it should beat inflation. There is a reason why equities should beat inflation. They're the reason why fixed income should beat inflation. Look at 35-40 years and gold prices will give you something which is less than inflation. What has actually brought gold on the forefront is last 15-17 years when the financialization of gold happened and global uncertainty has become very portable thing. Today we are on a 24 hour connected world where something happens somewhere and we are actually influenced by that and that drives the demand for gold in bad times or in times when we are anxious. But that may not be a great economic case for having gold.

Considering Diwali is around the corner, on Dhanteras people do buy gold. What do you think is the best way to do it?
Don't look at gold as an investment. Think of it like a spending. Think of it like having a notional asset.

So buy a gold coin, but don't think of it as an investment. Don't think of it as a big ticket spending. Don't think of it as you are acquiring an asset, because you need to buy historically or notionally or traditionally we have been buying it, so spend some money which is not very meaningful, but has a huge contextual ceremonial value.

Investing in gold is a different story altogether. Just in case you need to invest in gold for any reason for your deep belief in gold. Or you think that the gold is a hedge against all other kinds of uncertainty then buy the sovereign gold bonds because all other forms of gold ownership - the worst of the physical gold because it has the making charges. I don't know how much do you realise when you want the money and you want to sell it but getting your money back from that physical gold, that's the worst case thing. It has the highest transaction cost.

Next comes gold ETFs. Gold ETF is good but you have to buy it through a stock exchange and place an order like that. And it has an expense, although small, but it has an expense so you will earn little less than the gold appreciation to the tune of its expenditure.

Then comes gold fund which in turn invest in gold ETF, so that is easy to buy but then it has a little higher expense than gold ETFs.

Then comes sovereign gold bonds (SGBs). They are the finest form of gold ownership because you are able to ride the appreciation of gold. It gets you just as much, it has the highest safety and then you earn two and a half percent more. This is something where you are guaranteed to earn little more than gold which is two and a half percent annualised. And if you hold it for eight years, all the appreciation - if you buy in primary issue, hold it till appreciation, all the gains if there is a gain, you will get as much as a good appreciation and all the gains will be tax free.

For the newbies out there who are watching today's episode and who haven't yet invested anywhere but considering they listen to our advice and they consider investing, what is the best vehicle to start with for them?
It depends. If you're investing for many years, which I guess you will be, then start right now and it is possible to do it immediately. It is possible to do it on the Diwali day, because the fintechs have enabled ease of transaction of a kind which was not possible ever before.

You choose a fund and keep it simple. Invest in an equity fund. Now there are different ways of investing in an equity fund. When you go to invest in an equity fund you will be confused whether to invest in small cap, large cap, mid cap or multi cap or a flexi cap or an index fund.

If you can't figure it out, just invest in any. Choose one fund and get going. If you're doing your SIP, nobody can hurt you. If you are doing it for the next two-three years, you will end up being well off. The most conservative, simplest way is the index fund. The scary thing is small cap funds but it is also not scary to my understanding. I haven't come across anybody who will invest in a small cap for next five years doing his SIP and it will swing very wildly and that thing will be rewarding because you will be getting cheaper units in between. So I would say that don't even listen to any expert saying that this is a great time to invest or this is not a great time to invest.

Invest now. Choose any fund. Choose any fund with a three year history and a five star. So it will give you some kind of quality filter and get started, and make sure that you're doing your SIP for the next 36 months. And that is it. Things will be taken care of and don't watch it every day. Then it will become a habit and that I think is going to be the real Diwali for you because that will make sure that you are well off, you have fallen in habit and Lakshmi stays in your mutual fund account.

Click here to register for the next episode of Investors' Hangout.

This article was originally published on November 10, 2023.