Many of us aspire to travel the world, own a beamer or a Berkin bag, or live in a coveted seaside apartment. If this is what makes you happy, you should by all means do it. However, the same approach should not be extended to your investments. What we mean to say is that your investments should not be treated as consumption.
Perplexed? Let’s understand this further;
Your expensive diamond jewellery, big mansion or shiny sports car help you make a statement. It has become the ‘in’ thing to invest in products that are trendy and discuss them with your friends/ peers at a cocktail party or a golf session.
“I’ve just put in US$10,000 in Bitcoin.” “I have invested in a funding round of an upcoming startup that can be the next Flipkart.” “I have invested US$100,000 in an Alternative Investment Fund.” These are some of the statements you hear frequently nowadays. But are these prudent financial decisions? Will these investments help you meet your long-term goals? Will they provide financial independence to your family?
Investments such as cryptocurrency, AIF, Non-Fungible Tokens (NFT), startup funding, etc. are risky, volatile and tend to be illiquid. Let’s take the example of startup investment. For every Flipkart success story, thousands of startups have failed. Even if it sees some success, angel investors are the last people to see real returns. If you study the trends, most angel investors have not even been able to beat FD returns on their startup portfolios.
While people are rushing in to be part of the start-up bubble because of the frequent IPO announcements, they are underestimating the risk and overestimating the potential of these new businesses. Similarly, cryptocurrency has suddenly become extremely popular. Recent developments have shown us how unpredictable cryptocurrency can be. So many young investors have lost all their life savings in crypto assets that have gone kaput, especially in Tier 2 and 3 cities in India.
Another alarming trend has been the emergence of PMS/ AIF products as luxury goods, given the minimum ticket size of 50 Lakhs and 1 Cr respectively. Investors think of these products as vehicles of social signalling and a positive reaffirmation of the ‘I-have-made-it’ self-image
This is not to say that the above investment avenues should not be explored at all. Even if you want to explore high-risk investments, they should never be a significant part of your corpus. It will bode well to just dip your toe in new waters and keep any allocation to crypto, NFTs etc. under 5% of your overall portfolio. For products like PMS / AIF, they can be upto 10-15% of your overall portfolio, but only if your emergency fund is well funded and your overall portfolio large enough to take care of your financial goals over the next 5-7 years.
Invest for your future, invest for the long term
For long-term success, it is essential to identify life goals and map their timelines. Create an asset allocation strategy with the right mix of debt, equity etc that factors in your context. Take a consistent and systematic route to invest that will let you minimise volatility, as well as optimise your purchase cost of investments. Additionally, remember to secure your family and yourself against unforeseen risks by getting adequate life and health insurance and budgeting for a contingency fund.
If you’re unsure how to go about a financial strategy or need a course correction, employ the expertise of a wealth manager. They can help bring in structure and discipline with goal-based investing to ensure all your family goals are met. An advisory can help streamline your investment choices and tailor a strategy that marries your resources with your objectives. This ensures that your portfolio generates returns that meet your long-term needs and sets you on the path of financial freedom.
As the financial landscape evolves, there will be even more investment choices in the future. It is, therefore, important that you get help from a good wealth expert to plan for your needs rather than getting in with the trend. With a good set of advisors in your corner and a smart investment strategy, you can live the life you desire while building real wealth, the kind that lasts for generations to come.
by Prateek Mehta, Co-founder and Chief Business Officer, Scripbox