First Few Steps of Wealth creation

If you start investing, you will get a good return, but let us look at the risks.

Image used for representational purpose only. (File Photo)

To start Investing one has to understand Risk and Returns – this is of course the basics. If you start investing, you will get a good return, but let us look at the risks.

•   Risk of dying early! If you are a 24-year-old starting to invest, you need to realise that your parents, siblings (assuming you are paying their fees), etc. could be dependent on your salary income. In such a case, the first risk is the risk of dying early and this has to be covered by taking a pure Term Life insurance.
•   The second risk that a bread winner runs is the risk of falling sick or having an accident – a decent medical insurance policy should cover this risk.
•   Risk of Not having money for an Emergency: there is a Marwari saying “the work that money can do, only money can do”. If you have a family illness, a vehicle or an appliance breakdown you will need money to get it back into working condition. For medical emergencies you have medical insurance – but replacing a lost mobile, or television will need hard cash. So at least 6 months expenses should be available in a bank fixed deposit or in a liquid fund of a mutual fund.
•   The risk of being hit by a Critical Illness – this is different from just medical insurance. This CI cover helps you with some cash if you are not well and hence unable to attend office. This amount will help you meet the household (and office) expenses when you are unwell and admitted. As they say, read terms and conditions carefully.
•   It pays to be Debt-free when you start investing – having a marriage loan (own or sister’s), car loan, personal loan…etc. is not a great way to start investing. If you have ANY loan – overdraft, car loan, personal loan – the rate of interest does not matter. The interest that you are paying on the loan will surely be greater than the return you can get on the assets that you are investing. The only exception to this rule is when you have a long mortgage that you have taken to buy a house.
•   Invest in your own skills – It is a VUCA world – our portfolios are not really ready for say the US $ being at R30 in 2029, are we? The world is going to be Volatile, Uncertain, Complex and Ambiguous. Taking care of one’s health, and keeping on learning new things will be a very important investment. No advisor is going to tell you this – remember in a commission based world, no advisor has any incentive in asking you to invest in yourself!

Why does a person have to make these investments BEFORE he gets to invest in financial assets? Simply because when you start investing as a young investor and suddenly you have an emergency (say medical) you might be tempted (or forced) to remove from equity at a not very appropriate time. Not having adequate medical insurance may force you to borrow at usurious rates of interest. You may end up making some investments for the long term – but need the money in the short term. So investing in learning, health, insurance, etc. has to precede investing through mutual funds!

PV Subramanyam
writes at www.subramoney.com and has authored the best seller ‘Retire 
Rich - Invest C40 a day’