6 Factors Your Future Networth Depends On

Posted On Friday, Jan 23, 2015


The World Bank recently forecasted India's GDP growth rate to peak to 7% by the year 2017; to beat our neighbouring competitor China! This week the IMF’s figures fast-forwarded the year to 2016.

Oil prices halved from where they were a few months back in the international arena (but don't try arguing at the petrol pump; it's a long story why fuel price cuts are not passed over to consumers even when they are so acute!)

Closer home our very popular PM has been making all the right noises at the centre (what about the moves? please be more patient!). His speeches, foreign tours grab so much media limelight. Now all lenses are focused on the US President's visit to the country, which as the headlines announce, will give us a whole lot of goodies – from smart cities to investment treaties.

Stock markets too seem to be touching new highs almost every second week, with the market reaching a high of 29, 279 on 23rd January 2015.

Make a guess, which of these news or events affect your investments? While these are all welcome, because they are all positive developments for us, none of these should affect your investment decisions today. Not political developments, nor GDP forecasts for the next 3 years, or guessing Sensex level in December 2015, nor determining when the world's various geopolitical problems will be resolved.

Sometimes in investing, as in life, much ado is made about things that do not matter. Every once a while it is nice to cut the noise and focus on the things that do. Here we bring to your focus 6 factors – the only 6 – that determine your future wealth and net worth.

The 6 factors determining your networth

    1. Your savings rate
Your personal income is the top-line from which you would deduct amounts for spending on necessities and leisure. It is also from this top-line that you would set aside a portion to save. By the way, have you ever wondered why we call it "savings"? Inadvertently we seem to acknowledge that money must be "saved" from being totally "consumed", for the greater good of all concerned!

So if savings is so crucial to your financial well-being, is there an ideal savings rate, someone might wonder. Well, actually it would be vague to put down a number, as savings rate is very personal and differs from person to person. It is determined by several factors like your age, income level, number of dependents and financial goals.

Traditionally most people follow the savings rule which goes: savings = income - spending. That looks logical. You earn, spend on your living expenses and save whatever is left. But then we are dealing with a surplus, not "savings" in the sense mentioned above.

To save in that sense, the rule will have to be tweaked to: spending = income - savings. This means we'd have to estimate the amount that our future goals require us to put aside today and save it before we spend the rest. That would be the ideal savings rate for you. Now, this does not imply austerity measures; occasionally it is good to indulge in the little pleasures of life with the loved ones. Only, your future goals should not suffer serious setbacks because of them.

Thus more than the amount of your personal income it's the amount of personal savings that matters for your future net worth. Your savings should translate to investments because if left idle they would lose value over time.

    2. Duration your investments compound
The length of time you let your investments compound determines how much they can grow to. The simple Power of Compounding calculator on our website can help you to understand the concept of power of compounding.

Left by itself the invested amount can grow to large amounts over time. So starting early is the key. Plan goals and investments early and provide the time needed for your investments to compound and grow.

    3. Your asset allocation
The allocation of your investments across various asset classes plays a major role in wealth creation. Asset allocation is all about how you divide your investments among mutual funds, shares, bonds, real estate and gold. This proportion again depends upon factors like age, risk appetite and your financial goals. You can read more about it in an earlier article on asset allocation.

Not only is building an asset allocation important but the proportion must be maintained over your investing life by rebalancing from time to time.

    4. Individual investments selection
Without doubt your choice of funds, shares and bonds is a factor that affects your future net worth. Think over your own style of picking mutual funds. Do you spend time evaluating whether a scheme is consistent, whether it is being managed according to what the offer document says, whether the fund house is investor-centric or largely profit-centric (agreed, all firms must earn profits or in the long run their survival would be in trouble; yet there are the firms that put investors first). Or do you rely heavily on ratings, rankings and recent performance figures?

However it must be added that financial experts stress the fact that individual securities selection is only second to asset allocation. In other words your choice of shares & equity funds or of bonds & debt funds within the respective asset classes is secondary compared to having the proportion of assets in your portfolio right.

    5. Charges on your investments
Charges are an often ignored parameter of investments yet their role in creating wealth with your savings is not small. In the present mutual funds scenario the charges are in 2 forms - expense ratio and exit load. Expense ratio is a passive charge in that you don't notice it being deducted; it does not figure in the account statement as an explicit charge. This is because expense ratio is incorporated in the NAV of the scheme. Subbu has explained how higher expense ratio eats into your returns in an earlier article.

Exit loads act as sort of barriers to redeeming investments quickly. Thus they actually work in your favour. Stay put until at least the minimum required period and you'll sail over the exit load.

    6. Taxes you pay on your interest, dividends, and capital gains
As good citizens we'd not evade taxes but investors should do all they can to minimize taxes; and there are perfectly legal, ethical ways to do it. By selecting the proper financial products, going for the right options (growth/dividend payout/dividend reinvestment) and holding investments for adequate time periods you can minimize your tax outgo.

To sum up, what is important to you as an investor is saving as much as you can, letting it compound as long as you can, allocating assets properly, choosing your investments wisely, and minimizing your investment costs and taxes. These 6 factors alone matter in the growth and preservation of your wealth. Do consult your investment advisor for more guidance on investments.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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