Wealth creation is not about luck. It's not about where you start. It certainly does not require being a rocket scientist (in fact the truth is that scientists generally find it hard to make the ends meet!). It's about what path you choose and how dedicatedly you stick to that path.

We're here to tell you that it doesn't take much time, effort, or boredom to be a successful investor.

You just need to hit the road and get started...

Go through the Wealthfront University at your own pace and work in our tools lab to understand the implications of your learnings on your financial health. You should feel free to stop wherever you feel comfortable on this journey to financial nirvana. But when it comes to taking decisions about your life’s savings, we know you won’t mind investing a little time studying the road map first.

Let’s get talking before it’s too late and you click off to some other web site!

I don't need to write about discipline; our textbooks were brimming over with preachings on the stuff! And of course in our childhood, our parents were busy imparting us this crucial learning. But like all other noble values society teaches its young ones, this one is also passed over to the next generation untouched!

Our job here is talking about your personal finance matters and that's what we'll do, leaving the nobler stuff for our offspring.
The wonderful journey called wealth creation involves

1. Deciding your savings goals, 
2. Charting the road map to reach there, 
3. Finding the investment vehicles to take for the journey, (and finally the most difficult part) 
4. Sticking to the plan with discipline, but as we've decided we won't discuss it here!

[We believe that jargon used properly, do speed up the communication (apart from helping you in impressing your girlfriend!), so try to master them using our glossary at your pace]

1. Defining your saving goal
What are the things we save for? A house? A car? A comfortable retirement? Our children's future? A rainy day? The first step of our journey is deciding our investment goals.

Caution: Don't set vague goals. Experience tells us that vaguely set goals are seldom achieved, as we tend to postpone them. It always pays to set more concrete plans, where you put all your goals on a definite time axis. Ask yourself pointed questions: 

• How much will college cost when my child needs to go? 
• How much yearly income is reasonable for retirement?

One thing you need to face is that investing is a lot of numbers, better get used to it. This way you can see exactly what you need to reach your destination, and can be accountable to yourself along the way. Don't worry ... you don't have to do all the math yourself. We are here with our planners to help you figure your financial life. The more specific you can be, the more likely you are to set and achieve reasonable goals.

2. Charting the Road Map for Attaining our Goals

After setting our investment goals, we need to decide a timeframe for attaining them. The timeframe would broadly delineate when do we want to buy a house, a car, what will be the expenditure on raising kids at different stages of our life, when do we expect to retire, etc. Fiddle with our interactive tools to fine tune your understanding (enter tools lab).

To make sure that you will have enough money when you need it, follow this process:

• goals first.

• Decide how many years you have to meet each specific goal, because you'll need to find a investment vehicle that fits your timeframe for accomplishing each goal. Knowing how much time you have will help you decide how much risk you can take.

Use our tool to calculate what you'll need to save each year for building your retirement nest egg (enter tools lab)

Finding the Investment Vehicles to Take for the Journey

Now that we know where we want to go and when we want to reach there, we are ready to face the crucial question of how we go there. It involves knowing about various vehicles we can take and their pros and cons. Something as important as understanding individual investment vehicles is learning about mixing and matching them properly. This is called Asset Allocation. But first a word on debt management…

The liability side of your networth is as important as the asset side, as in the early phase of your life you need to take loan for most of the big ticket items you buy. Proper debt management is an important aspect of wealth creation.

You should try to pay off debt as soon as possible, if the interest you pay is more than what you make on your investments. Paying off a debt having an interest rate of 16% p.a. is as good as earning 16% p.a. post-tax on your investments, a pretty attractive return from any angle.

But in many cases by judicious mixing of debt and investment you can pack more punch in your financial life. If you buy a home taking a loan, the effective interest you'd pay after tax would be far less (in the range of 8-9% p.a.) than your effective return from your investments 11-12% p.a. (in fact the impact would be even pronounced if you've room for investing in tax saving avenues you may get return as high as 17-18% p.a.).

The rule of thumb is: Be free of high-interest debt when you begin to invest.

Let's move onto the next lap: The Investment Process.

Now that we are clear about what is required for wealth creation, comes the next part of investment process. Any time you are keeping money aside to get some more in future you're making an investment. Simply put, you invest to create wealth. This involves:

(i) Asset allocation, understanding why we need to mix and match various investment vehicles which requires knowing: return, risk and liquidity

(ii) Knowing our friends and foes in our journey to wealth creation

(iii) Learning about various investment vehicles, and finally

(iv) Designing the portfolio.

But before you push the accelerator, beware of potholes…

Like Indian roads, the road to riches also has many potholes. Get to know the common mistakes many people make, while investment decisions.

1. Doing Nothing. Remember the clock is ticking and every day you are not investing, you are not allowing your money to make more money for you. Doing nothing at all will not provide for a comfortable retirement.

2. Starting Late. As we'll see ahead, every day you are delaying your investment career, you take some more punch out of your money.

3. Investing Before Paying Down High Cost Debt. If you have money in your savings account alongwith a high cost debt, pay off the debt first.

4. Investing for the Short Term. Invest money for short term only when you're actually going to use it in the short term. Short-term investments won't even beat inflation, forget providing you with your kid's college fee after 15 years.

5. Playing it Safe. If you're young, most of your investing rupees should be in the stock market. You have enough time to weather any dips in the market and to reap the rewards of long-term gains. Although you may want to transition into bonds later in life as you depend on your investments for income, stocks should make up a large portion of the portfolio of every investor.

6. Playing at the edge. Don't pour all your money in the next hot tip you get from your millionaire-in-a-year friend. Understand the stock before putting a bet on its future.

7. Trading. This way the only person that'll make money will be your broker. Buying and holding for long term is your best bet for beating the market. Plus you get the added advantages of:

(a) getting a sound sleep every night,
(b) not wasting expensive internet time on checking your portfolio's worth every hour, and
(c) doing away with pouring over the small print of the stock quotes every morning (instead of reading the much more interesting saga of match fixing)!

Asset allocation is the financial jargon for deciding how much to put in various investment categories, such as Bonds, PPF, Equity, Gold, Bank Deposits, Cash, etc.  

There are no thumb rules for asset allocation, only guidelines. The choice of these avenues will depend on a number of variables, like our present and likely future income, present and future liabilities, our return expectations, risk appetite, temperament, etc. Remember: like all other important decisions in life, a person has to take his own financial decisions and it’s only him who is responsible for his decisions.

The basic inputs for taking asset allocation decisions are:

(i) Return
(ii) Risk
(iii) Liquidity

(i) Return We sacrifice our present needs to gain something more in future. Return is the promised or expected return from any investment avenue. One fundamental law of finance is risk-return trade-off. What it means is that a higher return generally comes with a higher risk, and conversely, low risk investment will fetch low return.

(ii) Risk Risk is a measurement of the uncertainty of the expected returns. In simple terms it tells you what is the likelihood of not getting the promised/expected returns and may be of losing the principal as well.

The question comes why a person in his right mind would buy an asset that is likely to fall in value. The answer lies in risk-return trade-off. An asset that is likely to give higher returns in future is likely to fall or increase more in the near term. This feature is called volatility.

To take a human analogy, people who are more adventurous are likely to face difficulties in the short term as compared to staid people who prefer watching TV and not doing much. But in the long term, (if the adventurous ones survive!) they are more likely to be successful also.

A person's ability for taking risk is determined by his age and liabilities, apart from his psychological traits. The risk appetite of a 25 years old trainee fresh out of the college will be different from that of a 40 year old executive with a family. Use our tool to understand your risk profile (enter tools lab).

(iii) Liquidity Liquidity deals with ease of selling the asset and getting cash. Generally a higher liquidity is associated with a lower return, given the same kind of risk profile.

So it is clear now that any asset is nothing but a bundle of risk, return and liquidity. The assets can be classified into various categories depending on their risk, return and liquidity profiles. Check out the risk, return and liquidity profiles of various asset classes (enter tools lab).

Diversification

As we found above each asset has a finite probability that it would not perform as per your expectations, you may even end up losing your principal. This is an inescapable truth and everybody has to face it.

Certainly no body would be comfortable with the thought of losing their entire money. The way to protect ourselves against this risk is by spreading our money among various investments, hoping that if one investment loses money, the other investments will more than make up for those losses. This strategy, called "diversification," can be summed up using the cliché as, "Don't put all your eggs in one basket."

Diversification can't guarantee that your investments won't suffer from future uncertainties. But it can help you balance risk.

We have got some great allies in our wealth building exercise and some real nasty enemies. The biggest allies on our side are Time and Power of Compounding and the enemy number one is Inflation. First about Inflation…

But don't worry, the beautiful lady called providence has given us two great weapons to beat inflation. They are Time and Power of Compounding… Let’s take a quiz first. How much does a cup of tea a day costs? Rs. 27 lacs. Surprised? Here’s how: if you save 5 rupees everyday and put it on work at 10% yearly return, the money will explode to 27 lacs rupees at the end of 50 years.

Another interesting example cited by Noble laureate Paul A. Samuelson. The Dutch bought island of Manhattan from Red Indians in 1626 for trinkets said to have worth 24 dollars. How shrewd, you would say? Firangs as always the blood suckers?! But hear this, if the natives had invested those 24 dollars in any European bank of that time, the money would have become 141 billion dollars today. More than the value of entire real estate of Manhattan! Pretty one-sided deal, eh?

If you are still not convinced about the powerful concept called compounding (which amazed even Einstein). Take a third one!

Ram and Shyam graduated out of the engineering college together at 21. Ram started saving 2000 rupees a month from the word go and saved till he was 35, when his liabilities increased, what with having a kid and all. At 60 his savings were around Rs. 1.5 crs. While our friend Shyam understood the need of building the retirement nest egg at 35 and started saving Rs. 4000 a month. At 60 his entire savings were worth 75 lacs…need to give any more examples! To find your networth at retirement based on various scenario,enter tools lab

The point I want to hammer-in is just that the time to start investing is NOW.

Discipline, time, and compounding are the three wheels for our journey to wealth creation-- not the amount of money with which you begin.

Now that we are clear about what we want to achieve, when we want achieve that and who are our friends and foes in the journey, let’s bring out the drawing board…

As we've seen, the greatest factor in growing your long-term wealth is the rate of return you get on your investment. But we live life in short term and need a certain amount of ready money also. And then there are the factors of time horizon and risk profile. We need all kind of vehicles to reach our destination, safe and sound.

Let's take a quick run down on what kinds of vehicles are available to us and what are their risk-return-liquidity profiles.

Fixed income avenues, also called Debt instruments , are known as "fixed-income" because the income they generate each year is "fixed," or set, at the time of your investment. No matter what happens it will generate exactly the same amount of money.

We can divide them as follows (click to enter Wealthfront classrooms for detailed understanding):

(i) Bank deposits including saving and term deposits
(ii) Government Small Saving Schemes
(iii) Company and NBFC deposits
(iv) Bonds and debentures

The risks that are associated with debt are: default risk and interest rate risk. (To understand the various terms associated with debt instruments enter reading room)

Default risk. Default risk captures the probability of not getting the interest and/or the principal. Though the borrower promises to repay your money on the designate date, it may run into rough weather and default on its payments (or may simply feel like not paying back the money!). The default risk depends on the borrower and you should know the creditworthiness before putting your money.

Assessing the credit worthiness of debt instruments is an entire industry in itself. Some agencies, known as credit rating agencies, perform the task of assigning the credit quality of fixed income securities. The credit quality is expressed by assigning a credit rating to the instrument, which varies from AAA (highest safety) to D (default). To understand the credit ratings in detail enter reading room.

Interest rate risk. The interest rates depend on host of factors and are very volatile. For example today getting an interest rate of 12% p.a. on a 5 year AAA debt instrument is a good enough return, while just 3 years back the market rate was in the range of 14-16%. Predicting future interest rate is an impossible task. So when you invest in a debt instrument that pays periodic interest, you may or may not be able to reinvest the interest at the original rate. The risk of not able to invest at the original interest rate is known as the reinvestment risk.

Also the market price of the traded debt instruments depends on the prevailing interest rates. If the prevailing interest rate is more than the original interest rate the price would fall and if the interest rate is less than the original interest rate the price would increase. This is known as the interest rate risk.

Range of maturities. Debt instruments are available in a broad range of maturities from cash-like avenues to 25-year FI bonds. For short term (less than a year) there are avenues like bank and post office deposits. For medium term (1 to 6 years) you can choose from bank and post office deposits, govt small saving schemes, company and NBFC deposits and debentures, etc. For long term (7 to 25 years) there are PPF, bonds, etc.

When you buy equity shares you become a part owner of the company which means you share the upside and downside of the business in equal measures hence "equity".

Equity shares fall into the category of instruments that don’t assure returns. The value of your investment will go up and down with the fortunes of the company. If the company does well and make money from its business, its value goes up. If it's busy in doing the same old thing in the same old fashion and its management is busy watching cricket matches at Sharjah without bothering about the customers and the market realities, its value would go down and so will the value of your investment.

In equity the return comes in two forms dividend and capital appreciation. A company pays a part of its profits to its shareholders, this cash payment is known as dividend. You buy shares at a particular price expecting the to go up in future. This increase in price is known as capital appreciation.

Now comes the question that why would one buy equity, when the returns are not assured. The answer is provided by the basic make-up of equity, where you ride the business of the company to the extent of your stake. In the long term equity provides you more return than any other instrument. It's your best bet for long term wealth creation.

Not all equity shares carry similar kind of risk. Before investing in shares of any particular company, you should understand the risk -return equation.

You can buy or sell equity shares in the share market, hence its liquidity is very high.

The above two are the direct investment avenues. You can invest in these securities indirectly also using mutual fund (MF) route. An MF is simply money pooled together by a group of people for investing together.

MF is a good vehicle to ride for the beginners in the investment game. It allows us to take exposure in the instruments, which we may not be able to buy directly. Also we get the services of a professional fund manager for looking after our investment.

One thing you should understand that MF does not give you assured returns and its performance would be as good as the assets it invests in. A mutual fund can be divided in various categories depending on the underlying assets, its life, investment objective, etc. like:

Based on asset class: Debt, Equity fund, Balanced fund, Money Market fund, Gilt fund
Based on time period: Open-ended fund, Close-ended fund, Interval fund
Based on investment objective: Income fund, Growth fund, Hybrid fund

The kind of fund you buy will depend on your time horizon, return requirements and risk appetite.

If you've read upto this point, I'm sure you are serious about being a wealthy man and are itching to go ahead and start your investment career. Let's stop and see where have been.

We know where we stand today, where we want to go and the time frame for reaching there.
We've learned that proper liability management is as important as asset management.
We have peeped into the investment process and the potholes to avoid during our journey.
We've learned about asset allocation and about the parameters that will influence our decision.
We know how to use diversification for managing risk. We know our friends and foes in the journey to wealth creation.
And finally we know about individual vehicles to take.

Now we need to place the various pieces of the jigsaw puzzle, that is portfolio designing, to build our own fleet. Because unlike a temporary jaunt to Bahamas, where we can afford to ride a single cruise, the permanent trip involves making a well designed fleet of assorted vehicles!

The choice of vehicles for our fleet will depend on our road map and the time frame.

The first step in portfolio building is keeping aside enough cash in liquid form to tide over any temporary difficulties. But remember: just enough, as higher liquidity means lower returns. (Don't forget that our perpetual enemy inflation is always trying to pull us away from our dream villa at Darjeeling!)

We should have enough cash at hand that will help us sail through rough weather, like a temporary illness, a job loss, etc. A good rule of thumb would be to keep aside around 6 months' expenses in the most readily available form.

The bank deposits will offer you an interest in the range of 6-7% for less than one year funds. If you go for flexi-deposits, you can get higher interest but you'll have to invest around Rs. 25,000 in private banks. Shop around and try to get the best terms for highest return with immediate liquidity.

A very good alternative to bank deposits is money market mutual fund (MMMF). Here you get return in the range of 9-10% p.a. and can withdraw the money any time after 15 days.

After you've built a cash cushion, you need to think about your medium term goals, like buying a car, a house, kid's education, etc. Money that is required within next 5 years, should mostly be kept in fixed income securities, either directly or via MF route.

You have various options to choose from in this range depending on your exact time frame, investment amount and tax bracket.

Bank deposit will give you a return of 9-10% p.a. interest income above Rs. 12,000 p.a. will be taxable. If you decide to go for bank FDs, remember to go for automatic reinvestment of interest. Recurring deposit is a good way of disciplined saving, as you've to invest a fixed amount every month, but again the returns are not adequate in bank deposits.

FI bonds including infrastructure bonds are one of the more remunerative alternatives to bank deposits. You also get tax rebate of 20% on investment in infrastructure bonds, upto an investment of Rs. 20,000. IDBI and ICICI bonds are available most of the time during a year. One thing to keep in mind is that FI bonds are unsecured and carry all risks associated with debt. You should not treat them as govt paper.

MF debt schemes with cumulative options are also a good option. But these do not give assured returns and their performance depends on the market conditions. If you are investing for medium term than invest in a fund that invests in medium term paper. This way you can minimise the impact of interest rate movements on the valuation of your investment. In case you invest in long term paper, if the interest rate increases the price will fall much more than that of a medium term one.

These schemes are especially good for a horizon of 1-3 years. As they generally give higher return than banks and their liquidity is also better. For longer tenure PPF, saving certificates or FI bonds can be a better alternative.

Substantial portion of fund that is not required within next 5 years should go in equity shares. The exact amount would depend on lots of things like your age, present and future income and liabilities, the cushion that you already have in term of savings, your exact time frame, your attitude towards taking risk, etc.

Whatever be the individual factors in your specific case, equity has been the most rewarding asset for long term investments. Also it's your best bet against the inflation. Again there are various categories of stocks and you can choose them depending on your situation.

Here we come to the end of the beginning of the wonderful journey to wealth creation.
 
You should understand that we've just taken the first step in our desired direction. Investing is not something you do just once -- it is an ongoing process that requires time and attention. And it'll never cease to amuse you with so many milestones to cross and so many treasures to uncover. We'll continue to walk along on this journey to financial nirvana.

One more thing to keep in mind is that investing is more than boring numbers and concepts. It is what enables us to do what we want to do. Like buying a home, a car, giving the best education to our kids and yes, of course, a happy retired life watching the beautiful sky, sitting on the green grass under the shadow of a tree.

Though we've assiduously avoided the topic through out our walk, I won't leave you at this point without reminding you about the most essential thing about wealth creation: Discipline. The right thing is to establish a regular "rhythm" of savings and rock.