Everybody wants to get rich quick, but very few people actually do. If you are serious and can give some time, being wealthy then is not a matter of chance or luck. Every rich individual or family at one point started with zero assets and then used a plan to become what they are today. Good investments when given good time become great money-spinners. Here are some investment avenues that have the potential to make you rich in the long term:
1. Direct mutual fund plans
Some years ago, the Securities and Exchange Board of India (SEBI) mandated mutual funds to compulsorily launch a direct plan for direct investments, i.e., investments not routed through a distributor. Such separate plans, known as direct plans, have a lower expense ratio because they do not have to pay distribution expenses, commission, etc. Direct mutual fund plans are a goldmine when it comes to money-making. Typically, regular funds have an expense ratio that is 1-1.5% more than direct plans. Do you know what is effect of 1% recurring charge? It’s a lot. A 31-year old investing Rs 10,000 per month via regular SIP plans can accumulate Rs 78.75 lakh if the investments grow at 8% per year for next 25 years. If they invested via ‘direct’ mode, they can accumulate Rs 91.5 lakh or Rs 12.4 lakh more. If they invest Rs 20,000 per month, regular plans will give them Rs 1.57 crore after 25 years but direct plans will generate Rs 1.83 crore or more than Rs 25 lakh.
2. Employee Stock Options
Many young salaried individuals today have access to Employee Stock Options. Yet, many do not view ESOPs as a serious money-making investment. ESOPs can generate tremendous amount of wealth. There are many examples of how employees became rich by buying ESOPs. The value realization is maximum when the company goes for an IPO. For instance, after Bandhan Bank’s successful IPO, thousands of people from humble backgrounds overnight turned into paper-millionaires. More recently, HDFC AMC’s IPO spun its own wealth story for riches. Key staff got thousands of ESOPs, and after listing, two employees were sitting on potentially a billion rupees each of holdings. Post the Flipkart-Walmart mega deal, the money that Flipkart employees are expected to make from ESOPs has also caught the limelight. So, next time your employer encourages you to utilize an employee stock ownership plan to acquire stocks or ownership in the company, think again.
3. Growing annuities
Most people believe that annuities are sub-optimal products, and rightly so. In most annuity variants, the annuity income is taxed and also the payout is not great in the sense that its like an FD with 5-6% interest rate. But do you know there are annuities which pay you a fixed increase every year? Yes, some of these growing annuities pay 5% more every year lifelong. So, you get 5% more annually for each complete policy year throughoit your life. While it is true that these growing annuity payouts are lower than regular annuity. For instance, a Rs 50-lakh one-time annuity purchase gives you Rs 3.4 lakh (fixed for all years) as regular annuity and Rs 2.02 lakh (for 1st year) as annuity growing at 5%. By around the 20-21 years, both options would have generated a cumulative Rs 72 lakh. From here on, the 5% growing annuity starts paying off a lot of money compared to a fixed annuity. A 30-year person after 20 years would just be 50 year old. If he/she lives for another 25 years (age = 75), the fixed annuity will still pay Rs 3.4 lakh a year but the 5% growing annuity would pay Rs 18.16 lakh a year! Therefore, in the long-term, a 5% growing annuity can generate more than double the wealth and the best part is the guaranteed nature of this scheme.
4. Gold bonds
Gold sovereign bonds or SGBs are a delectable investment option. This is because it combines the safety and hedging property of gold asset with the fixed income part of a bank fixed deposit (FD). As a result, you are always gaining even if gold price actually falls. The trick to generate wealth over the long term is to lose less. In gold bonds, you never lose because of the 2.5% interest per year. While gold prices have not moved much in the recent years, gold remains a strong safe-haven asset when financial markets drop. So, when gold prices rise and they eventually will, you can get the fixed interest plus capture the price appreciation part. With long investment tenure of 8 years (for maturity), you can potentially sit on much bigger gains in gold bonds than others investing in physical gold or gold exchange traded funds, both of which do not give any fixed return.
5. Focussed portfolios
If you are investing in stock markets on your own, you have a chance to become rich if you use the focussed portfolio approach. By selecting 10-15 stocks and concentrating them over the long term you can get serious wealth, than just buying the season’s favourites and accumulating 40-50 stocks in your portfolio. A focussed approach allows you to capture the gains in stocks in a much better way because the investments are spread over a few stocks, with individual stock weights being 5-10%. But in a much wider portfolio, you get stock weightages of 1-2% because the money is invested in 40-50 stocks. Even if you have many winners in your 50-stock portfolio, at an aggregate level those gains will not be reflected in a big way. A 1% weight of a stock giving double returns will only become a 2% weight! Of course, focussed portfolios are riskier than traditional 50 stock portfolios. Risk and reward go hand in hand. However, if you top quality stocks in your narrow portfolio, the chances of negative events are much lesser.
(By Anil Rego, Founder and CEO, Right Horizons. The views expressed are his own.)