The power of compounding: Your key to long-term wealth creation

Every individual wishes to have wealth, which can empower them to lead a financially independent and secure life filled with the luxuries they crave – be it a world tour, a stately abode or simply the freedom to lead their life on their terms. However, in the absence of a fairy godmother or a genie, the effort behind wealth creation falls on one’s own capable shoulders. Famous author Idowu Koyenikan once said, “When money realises that it is in good hands, it wants to stay and multiply in those hands.” So, how can you create wealth and ensure it stays for good?
Understanding the concept of Wealth Creation
If you think the best way to create wealth is to earn more money, your plan has a fatal flaw. This is because, as an individual, you can only earn so much money in the duration of your career. However, if you devise a roadmap to invest your money and make it work for you, wealth creation becomes feasible. Therefore, wealth creation involves the process of investing the money you have at hand in asset classes which are aligned with your investor profile and financial goals, with the aim of growing your wealth sustainably. During this process, you will come across the best friend of the wealthy – the concept of compounding interest, which involves earning returns over both your invested principal and the gains accrued so far. Accordingly, the sooner you begin your wealth creation journey, the longer you allow it to grow, thus leading to better outcomes.
Importance of Wealth Creation
When you earn a good salary every month and find it sufficient to manage your lifestyle, you may belittle the importance of wealth creation. However, if you cannot generate money passively, you will be forced to remain shackled to your job. Further, the lack of a well-strategised wealth creation plan will end up pinching you once you retire. When you focus on wealth creation, you find it easy to achieve your financial goals, be it short or long-term, without eating into your savings. As Henry Thoreau wisely noted, “Wealth is the ability to fully experience life.” And that, in itself, underscores the imperative nature of wealth creation.
Investment options to consider
Now that you know the meaning and importance of wealth creation, how should you go about charting the roadmap? Firstly, you need to assess your investment profile, which includes aspects such as your risk appetite, return requirements, time horizon and financial goals. For instance, someone with a longer time horizon and higher appetite for risk has the ability to invest in equities and earn higher returns. Alternatively, for medium duration goals, a combination of equities and a safer option like bonds may be the right approach.

Given below are some of the asset classes you can consider for your investments:

• Equities: You can consider equity investments by picking the stocks of fundamentally strong companies to realise the potential for high returns, especially over the long term. Remember to diversify your stock portfolio to reduce the underlying risk.
• Debt: Fixed-income securities such as government bonds, corporate bonds, and short-term papers like commercial papers fall under this category. These tend to be less risky than stocks.
• Mutual Funds: These instruments pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets based on their strategy, thus ensuring diversification and professional management. Systematic Investment Plan(SIP) is a facility that fund houses offer that allows investors to invest a specific amount of money at pre-determined intervals.
• Real Estate: Investors can consider investing in real estate investment trusts (REITs), in the quest for rental income and potential appreciation.
• Commodities: Investing in commodities like gold or silver can provide diversification and act as a hedge against inflation.

By using a combination of these asset classes, an investor can build a diversified portfolio to reduce overall risk while optimising opportunities across different asset classes. In case you are unsure how to go about it, seek the help of a financial advisor and invest through mutual funds such that your investment is in wise hands. Whichever route you may choose, as long as you remain focused on your end goal and start right away, creating sustainable wealth will only be a matter of time.

Wealth creation is an attainable goal for anyone willing to invest time and effort into building a solid financial foundation. So, start your journey today, and watch your wealth grow over time.

Disclaimer: The article is authored by Amit Rathore of AR Finserv. The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India. Do your own research (DYOR) before deciding to invest in any financial asset class: