If there are easy ways to Build assets with little money, will it not be great?
Nevertheless, asset building is a very important priority.
Irrespective of its difficulty or ease, one must start soon enough the process of building assets.
It is essential and cannot be delayed much. How to do it?
Invest money and buy assets.
But throwing money here-and-there in the name of investing is not enough.
So what is the right way of investing?
Different people invest their money with different priorities.
Some people invest money for capital appreciation. Others invest money to generate income.
There are some who also invest just to lock their money (from getting spent needlessly).
More people these days are accumulating “income generating assets“.
Some experts even say, this is the right way of investing.
#1. Invest to accumulate assets.
Why we normally invest money?
Mainly for capital appreciation (high returns), right?
But investing money with such motives has rather shorter lives.
To give a longitivtiy to your investment journey, fix a more sturdy goal. Why?
It is my personal experience that, goals focused only on returns loses its steam too soon.
Example: When goal of a new driver is to drive car @150Kmph, he will not enjoy driving.
As he does not know to drive a car, he just cannot drive @150K at that moment.
What is the result? He interest in driving will fade away.
But if the same driver fix a goal of building driving skills like Michael Schumacher.
Skilful driving will be his asset.
This will take him further. He will eventually become a skilful driver.
Moreover, fast driving will happen as a by-product of skilful driving.
The same analogy is applicable for investors.
What investors should focus on, instead of high returns?
The focus should be on the “knowledge” to identify great assets
This way one can accumulate more good assets.
High returns will happen as a by-product of good asset accumulation.
#2. Accumulate income generating assets.
Now we know that investment must be done with the objective of asset accumulation, but which assets to accumulate?
Good investing (for many) is, accumulation of income generating assets.
These are such assets which people hold forever (Even Warren Buffett likes it…)
This is unlike stock trading, where focus is more on early-selling and quick-money making.
Good assets generates money on its own. Hence one must focus on buying such assets.
Imagine yourself having several such assets in your portfolio. Just because you are holding those assets, you will earn income.
In stock trading, one has to buy, watch and then sell to book profits.
But dividend stocks, pay you dividend income anyhow. No need to watch, no need to sell.
Similar analogy can be build for rental real estate property. Rent will keep flowing in month after month.
The only care one has to take, is while buying income generating assets. Investors must double-confirm the quality of the asset before including it in the portfolio.
But people often miss this clue.
In real world, people focusing on accumulation of income generating assets are rare. Majority focusing on quick money making.
So what is the solution?
#3. Build Assets for Financial Independence.
Investing money for accumulating assets is a nice goal.
But if someone asks, why you are accumulating assets, what you will answer? To generate high returns?
Doesn’t sound good, right?
Investment has a more deeper meaning. It cleverly deals with lots of prejudices that we carry in our mind.
It helps us to be delay gratifications. It helps us to practice frugality. Investing helps people to plan their future etc.
There are huge benefits of investing money. Sum-total of all those benefits are so huge that I often compare the process of investment with spirituality.
I know this is an overstatement, but for me investment is like preaching a wiser motive.
What is this wider motive?
I call it “financial independence” for my family.
While investing money, be ready to take a LONGER ROUTE. Forget about investing, forget about assets, forget about money-making.
Invest money to gift yourself financial independence.
Knowledge about what good financial independence can do to somebody will make the ball rolling.
The broader objective of investing should be achievement of financial independence in life.
#4. Financial independence and Job Dependency
How many of us love our job?
I know not many of us will raise our hands to this question.
But if we do not love our jobs, why we continue lingering on to it? Because there is no choice.
To continue to earn money, doing job is a compulsion.
This is where the theory of financial independence find its importance.
A financially independent person need not do a job he doesn’t like. How?
A financially independent person has enough assets in his investment portfolio. These assets generates income which can support the standard of living.
This stage can also come in our lives. Only thing that we have to do is to accumulate income generating assets.
But how many of us strives to accumulate income generating assets? The count can be in fractions.
For most of us, quick money is more inviting, right?
But quick-money-making-people are those people who become slave of their jobs. They do not have an alternate source of income. They are too dependent on paycheque from their job.
There can be no better alternate source of income than passive income.
A parallel source of passive income is what can make a person financially independent.
#5. Assets generate passive income.
The above infographic represents a difference between “passive income” and “salary income”.
Salary income comes from doing a job and building a reputation for self in the company.
Salary income comes from assets bought as investments.
The higher will be the passive income, more financially independent is the person.
What makes ‘passive income’ different & better from ‘salary income’?
To generate passive we need NOT work full time (as we do in our jobs). If one is working hard to generate an income then it is not passive income.
#6. How a common man can generate passive income?
By investing money intelligently. Buy income generating assets, which in turn will yield passive income.
People who are Rich has a portfolio FULL of income generating assets.
People who have become wealthy has done it this way. They use their regular income (from business, job) to buy assets.
Assets accumulated in this way generates passive income.
It is not our income from job/business that can makes us rich. It is their ever increasing passive income that can make us really rich.
Accumulate small-small assets every month, year after year. Over time it will make you rich.
Lets see practical examples of how to build assets:
#6.1 Start Saving Money
The first step of building asset is to save money.
Saving money is more important than investing itself. If we know the right tricks of saving money, our half job is done.
The easiest way to save money is to put aside part of income.
Reducing needless spending will also increase free-cash in hand.
Even richest men in the world has to save money to stay rich.
As a rule of thumb, if one saves 25% of total income, it is called a decent saving. Give standing instruction to salary account to divert 25% money to saving account. This should happen on the first day every month.
Before spending even a single penny, 25% must vanish from the salary account. It should be as if it never existed.
This will be a good starting point to inculcate a good saving habits.
I have a written a separate article on how to save money. I will suggest interest readers to also read it.
#6.2. Invest in Recurring Deposit
People start their investing journey with equity investing.
But I have a different take on this.
A new investor must start with a product like recurring deposit.
But when in the world recurring deposit became so important? They cannot even give large returns….
But what recurring deposit does is to nurture a habit of investment.
Recurring deposit is a process of automatic investing. Here, without interventions of anyone money gets invested effectively.
Recurring deposit also helps to lock cash. Locked cash prevents it from getting spent needlessly.
But why to invest in recurring deposit when we have equity/stocks?
We must prevent ourselves from investing compulsively in equity. We must wait for the right opportunities to invest. Compulsive investing can never give best returns.
Recurring deposit (RD) restricts investors from doing loose investment.
This money gets locked.
When opportunity comes (like stock market crash, gold price fall, new real estate project etc), RD money is liquidated to buy undervalued securities (like stocks).
#6.3. Start SIP’s in Mutual Funds
SIP in mutual funds is very useful tool for new investors to accumulate assets.
Starting a SIP has multiple benefits. New investor can get exposure to equity, debt, real estate sectors from a single window.
The best will be to start a SIP in dividend yielding mutual funds. Continue investing in mutual fund, through SIP’s. Keep contributing to SIP till eternity.
Initially, dividend yield from mutual funds will be pea-nuts. But after lapse of 3 odd years, this dividend income will start becoming noticeable.
SIP is a great way of assets accumulation. People with even zero investment knowledge can start a SIP.
SIP automates ones investing process.
It is my personal favorite.
All new investors should have at least one SIP in their investment portfolio.
My personal choice is dividend yielding mutual funds.
Why dividend yielding funds?
There are two reasons for investing in dividend yielding funds.
Firstly, dividend fund generates passive income. Secondly, stocks that are held by dividend funds are generally fundamentally strong stocks.
This way one gets double protection.
We earn short-term income as dividends. Our portfolio is also stable due to inclusion of fundamentally strong stocks.
Dividend income can be further re-invested to buy more units of dividend mutual funds.
So this starts a CYCLE of asset accumulation.
Buy Units > Generates Dividends > Buy more units > Generated higher dividends.
#6.4. Buy Value Stocks
Do not just buy any stock. Buy only value stocks.
What are value stocks?
Value stocks are fundamentally strong stocks which are available at undervalued price.
Fundamentally strong stocks are rarely available at undervalued price levels. This is the hard part.
So how to identify value stock?
Value stocks are not available all the time.
When we are investing compulsively, we are only buying overvalued stocks. We must avoid purchase of overvalued stocks.
Overvalued stocks cannot be treated as assets.
Identification of value stocks can be done in two ways. (a) Wait for the market to collapse or (b) by learning stock valuation.
When stocks market crash, price of all stocks falls. This brings its price to undervalued levels.
Stock market crash is like value investors fantasy. This is the ideal time for bagging quality stocks.
It will be a pity if one does not have enough money to buy stocks in such moments. This is where the savings accumulated in Step-1& 2 will prove useful.
Value stocks bought at undervalued price levels yield outstanding dividend income.
Even capital appreciation of value stocks (bought during market crash) is fantastic.
But how to know which stocks is good quality and which stock is bad quality?
To make the job easy one must prepare their own list of good quality stocks.
Generally we call these stocks as BLUE CHIP stocks.
How this list preparation will help…?
Such a list always remains in the pocket of investors. One fine day, when stock market crashes, this investors will not start searching for list of quality stocks. He will have his list ready.
#6.5. Buy Real Estate Property
The money locked in RD, SIP, stocks etc is all done with one objective.
At some point of time, it should be redeemed to buy a real estate property.
Idea of doing this is simple. Keep more of those assets in portfolio which can generate quality passive income.
Quality passive income is one that is predictable and self-increasing (beating inflation). Income from real estate can do both.
Rental income appreciates at rate of inflation every 11 months. Value of property also appreciates at least @ of inflation.
This is why there can no better investment options than real estate property.
Rental income is the best passive income. It is even better than dividend income. Predictability of rental income & its growth is more than dividend.
In the process of building assets, keep real estate component heavier is suggested.
If it is so why, many people invest in stocks instead of real estate property?
It is not easy to invest profitably in real estate. Property purchased on basis of home loans lower its profitability.
So how to make real estate property investment profitable?
Large fund is required to make big gains in real estate investment.
What a common man can do?
Unfortunately not much is in our hands. But what we can do is, set a target of property purchase (say 5 years from today).
For next 5 years one should save regularly to build funds. This is an essential step. Setting a target and saving regularly till purchase date must be practiced judiciously.
After 5 years one must use these funds to make a down payment (seal contribution) of a property. The higher will be the self contribution the better. Higher self contribution will increase the property yield.
But how much yield is good?
A profitable property is one which yields more than 6% income.
Example: Real estate property worth Rs 1.0 crore, earning rental income of Rs 6.3 lakhs per annum. In case the rental yield is 6.3% per annum.
#6.6. Accumulate Gold
While building assets, experts never ignores the requirement of emergency fund.
Emergency situation in life will come no matter how cautious we are. Better is to accept this fact and start saving to build emergency savings.
If not done, emergencies of life will surely eat away major chunk of the investment portfolio.
One must save at least 5% of income towards emergency fund. But locking these savings is essential.
If we keep emergency fund unlocked, it is bound to get spent.
How to lock emergency fund?
The best way to lock your emergency fund is investing in gold.
But why gold?
It is easier to sell gold when emergency situation arrives. Gold is also available in lower denominations. Hence, both accumulating and redeeming becomes easier.
#6.7. Maintain Emergency Portfolio
Nothing eats our assets faster than emergency. When emergency strikes, money flows in mad rush.
No matter how much assets one has accumulated, when emergency strikes it will eat a big pie.
The most common cause of money-drain is medical emergency.
It is advisable to keep sufficient back-up to handle emergency.
The best was to handle emergency is by maintaining a FAT emergency portfolio.
In emergency portfolio there shall be 2 things, Insurance & Cash.
Idea is that, when emergency strikes, one need not consume the accumulated income generating assets. Instead, emergency shall be managed only by using funds in emergency portfolio.
A healthy emergency portfolio shall have the following components:
- Life Insurance Cover– Equivalent to minimum 10 times the annual expense
- Medical Cover (family)– Equivalent to minimum one annual expense
- Car Insurance– Equivalent to minimum 50% of annual expense
- Property Insurance– Equivalent to current Market Value of the property
- Cash:Equivalent to minimum 50% of annual expense
#6.8. Take Financial Education
Financial education is the best way to build assets.
A financially educated mind is like a money printing machine.
A well educated mind has a uncanny ability of getting the job done.
When it comes to making money, enhancing ones mind with financial education will prove very beneficial.
In this world majority people lead a mediocre life. This is simply because people are financially illiterate.
If one only knew how to make money, becoming rich will be easier. Training ones mind for finance management needs education and practice.
I personally feel, reading good books and online article will work.
One of my favorite book on investment of money is “The Intelligent Investor” by Benjamin Graham.
Financial education is one direct & most effective way of building assets in long term.
#6.9. Buy High ROE & ROCE Stocks
Stocks of highly profitable companies make great assets.
Few companies like Castrol India and CRISIL are few examples of companies that enjoy very high ROE & ROCE.
But why high ROE & ROCE stocks are so interesting for asset accumulators?
Generally companies distribute a part of its net profit as dividends.
After payment of dividends, balance net profit is RETAINED EARNINGS for company. The retained earnings is added to the RESERVES in balance sheet.
Companies RESERVES is used to produce goods and services.
Companies which generates higher profits for each dollar of retained earnings is considered better.
High ROE and high ROCE stocks represent such highly profitable stocks.
|Example Companies||Market Price (Rs.)||RoE (%)||RoCE (%)|
|Castrol India Ltd||295||68||82|
|Nestle India Ltd||4,939||47||36|
#6.10. Buy Exchange Traded Funds
Exchange Traded fund is another excellent investment product.
ETF’s carries with it advantages of both stocks and mutual funds.
Purchase of ETF’s can be done as easily as stocks. If one has online trading account, ETF’s can be traded like stocks.
If one is investing in ETF’s they need not worry about investment diversification.
There are three types of ETF available in Indian stock market. The most common are index & gold Linked ETF’s.
Lets take some examples of ETF.
Goldman Sachs Banking ETF has objective to give return to investor as CNX Bank Index.
Goldman Sachs Gold ETF has objective to give return to investor as provided by domestic price of physical gold.
Goldman Sachs Nifty ETF has objective to give returns close to total returns of S&P CNX Nifty Index.
List of few ETF trading in India with its performance for last 3 years is as below:
|Schemes||Latest Price (Rs.)||ETF’s Size of Asset (in Rs. cr.)||3Years Return (%)|
|GS Nifty BeES||811.03||588.97||13.9|
|Motilal MOSt Shares Midcap 100 ETF||12.1||243.02||17.7|
|GS Bank BeES||1,679.79||194.87||18.5|
|Reliance Shares Banking ETF||1,789.99||158.06||20.1|
|GS Junior BeES||172.55||83.65||19.8|
|Kotak Nifty ETF||816||73.11||14.1|
|Motilal MOSt Shares NASDAQ 100 ETF||249.79||64||27.7|
|Motilal MOSt Shares M50 ETF||76.37||33.1||16|
|GS Infra BeES||328.24||31.35||5.8|
|GS PSU Bank BeES||398.76||20.47||6.4|
|Kotak PSU Bank ETF||388.18||17.55||4|
|IIFL Nifty ETF||825.5||7.75||15.7|
|Kotak Sensex ETF||275.45||7.1||14.5|
|GS Hang Seng BeES||2,029.70||6.62||16.2|
#6.11. Build an Online Real Estate
Platforms like blogger and wordpress are used by many to build online real estate.
One can post contents and expert advice and increase value of such online real estate.
Initially, online real estate will look unrewarding. But once search engines like Google start liking it, traffic will start to flow in.
Internet has allowed people to build online real estate. This real estate can generate income like a commercial property.
A successful blog/website is be a very good example of an online real estate.
When such blogs ranks higher in search ranking, it will drive more traffic. High traffic means high earning potential.
In order to convert a successful blog into an asset, one should monetize it.
Best ways to monetize blog is by using Google Adsense & other affiliate links like Amazon, ebay etc.
Few blogging tips that helps building this asset is as follows:
- Write content that answers questions for your readers.
- Use social network to know what people want to know on your topic. Blog on this topic.
- Always proof-read your blogs. If you are liking your blog, other will like it too.
- Blogging regularly is a good habit.
- Building faithful audience is a must. Engage your readers on social network or RSS.
#6.12. Focus on Investment Portfolio Creation
People often concentrate too much on single assets.
Common questions we ask are which stocks to buy? which fund is good? Is gold a good options? etc.
Actually no investment options in isolation is safe. It is essential to keep our investments well diversified.
Diversification will happen when we include different asset class in our investment portfolio.
Depending on ones investment horizon one can pick-and-choose suitable mutual funds.
I have indicated what proportion of investment fund shall be allotted to which mutual fund. Though it is just an example, but my readers can start a SIP of say Rs 5,000/month and distribute funds accordingly.
Target should be keep on buying such funds regularly month after month.
Let the money get accumulated. If you need to redeem funds, redeem it only temporarily.
Redeeming does not mean stopping the investment. Keep contributing to your investment portfolio regularly.
Observe how the portfolio grows with time. This is how one can build long term assets assets even if the invested capital is not so big.
Examples of Investment Portfolio:
Investment Horizon Based Portfolio
1) Investment Horizon < 1 Year
|Sl.No||Scheme Name||Allocation (%)||IYR %||3YR %||5YR %|
|1||Tata Money Market Fund (G)||50.00||8.80||9.11||9.00|
|2||Franklin India Ultra Short Bond Fund (G)||50.00||9.85||9.93||9.63|
2) 1Year < Investment Horizon< 3 Years
|Sl.No||Scheme Name||Allocation (%)||IYR %||3YR %||5YR %|
|1||HDFC Balanced Fund (G)||40||18.99||23||15.82|
|2||Birla SL Monthly Inc Plan II – Savings 5 Plan (G)||40||12.53||11||9.78|
|3||HDFC Short Term Opportunities Fund (G)||20||9.73||9.39||9.23|
3) 3Year < Investment Horizon< 5 Years
|Sl.No||Scheme Name||Allocation (%)||IYR %||3YR %||5YR %|
|1||ICICI Prudential Focused Blue Chip Equity Fund -RP (G)||50||16.09||23.73||14.62|
|2||Reliance Monthly Income Plan (G)||40||13.64||12.4||9.97|
|3||Franklin India Income Opportunities Fund (G)||10||10.8||10.08||9.31|
4) 5Year < Investment Horizon< 10 Years
|Sl.No||Scheme Name||Allocation (%)||IYR %||3YR %||5YR %|
|1||Canara Robeco Equity Diversified – RP (G)||30||17.36||21.35||13.02|
|2||HDFC Mid-Cap Opportunities Fund (G)||20||31.72||32.7||20.79|
|3||Mirae Asset India Opportunities Fund – RP (G)||30||23.6||28.54||16.73|
|4||Birla Sun Life Dynamic Bond Fund – RP (G)||20||11.95||10.07||9.48|
5) Investment Horizon > 10 Years
|Sl.No||Scheme Name||Allocation (%)||IYR %||3YR %||5YR %|
|1||ICICI Pru. Focused Blue Chip Equity Fund – RP (G)||40||16.09||23.73||14.62|
|2||Mirae Asset Emerging BlueChip Fund – (G)||20||41.75||39.93||24.89|
|3||Reliance Equity Opportunities Fund (G)||20||23.61||26.82||16.98|
|4||Birla Sun Life Dynamic Bond Fund – RTP (G)||20||11.95||10.07||9.48|
#6.13. LAND is also a must buy Asset
Land is an asset which is going more and more scarce.
Consider the case of cities like London, New York City, Los Angeles, Paris, Tokyo etc.
Probably, a piece of land in these cities are the rarest of rare items.
Investment in land is enjoyed by both super rich’s & common men. But not everyone can convert a piece of land into ‘Asset’.
Some people have doubt about land being an asset. They questions the capability of land to give above average returns.
The seed of doubt was sown in minds due to many bad examples. More people have lost most in land investment than real estate.
Not all land can be considered a good asset. Just because a piece of land is available for sale does not make it a valuable asset.
For investors, it is essential to first quantify worth & return of a land.
To quantify these two things, location of land is a deciding factor.
On a piece of land, a residential or commercial property can be built. But in this case the land must be strategically placed in the city.
Land placed 30 km away from city outskirts will take years to become an asset. Location of land is a very important parameter that will make it a valuable or worthless asset.
One great idea of asset building is to keep buying land just on outskirts of important cities. [Remember: Every couple of years the boundaries of big cities keep extending]
#6.14. Cryptocurrency Like Bitcoin.
Here not many will agree with me, I know. But cryptocurrencies are going to be the future digital money.
Unless all Central Banks of the world decide to step against it, onslaught of cryptocurrencies cannot be stopped.
One such famous cryptocurrency is Bitcoin.
In Sep’17, I say Bitcoin trading at Rs.350,000 levels. Today in Dec’17, it is trading at Rs.11,30,000 levels.
But do not take me wrong, I am not calling Bitcoin an Asset because of its price jump. It is the next revolution in the financial market.
I am not sure if Bitcoin will survive the rough waters in times to come. But if it survives (which I believe, it will), the present price levels of Rs.11,30,000 is not even a fraction of its true value.
Accumulating Bitcoin (or some reliable cryptocurrency) in bits and pieces starting from today is not a bad idea.
To know more about bitcoins….read this.
Misconception About Assets
I often face this dilemma myself. Whenever I have extra savings I get confused. I cannot decide whether to prepay my home loan or to buy a new property for rental income.
When I dig deep into investing-basics, the answer becomes clear.
A new property is better investment. New property is a hard asset. Moreover it also yields rental income.
Investment logic asks us to accumulate assets. As assets adds money to our pocket, we should strive to buy assets instead of thinking to reduce loan burden.
But there is a catch in this assumption. If a new property is yielding low returns it is not worth investing. Rental yield lower than 6% p.a. is not worth investing.
The point I a trying to prove is, investors must focus on Yield generated by an asset before buying it. If yield is low, look for alternative options.
We cannot always take-for-granted a real estate as an asset. A self occupied home is not an asset.
If our focus is to accumulate asset, we cannot consider a self occupied home as an asset. Self occupied property is a liability. It is not an asset as it does not add money to our pocket. Instead of adding money, it adds to the expense.
It is important to note that all assets must yield income. A non-income generating thing is not an asset.
One of my friend gave me an example of how he considers self occupied real estate property as an asset. He said he can used the property to get more loan. So this way there is a cash-in, hence property is an asset.
This is a common interpretation. But unfortunately its not correct.
When one uses a property as mortgage to take loan, he is applying for a LIABILITY. Whether he/she is availing personal loan, education loan or even home loan, still it is a LIABILITY.
We can show our existing property as security and get loan.
If we would had paid say for education by selling a property, we had utilized the property as asset.
But if we are just using it as security to take more loan, we are just increasing our liability.
When we sell property for profit and use the fund for our use, we are utilizing property as an asset.
A non-income generating property which we do not intend to sell for profit is actually not an asset (gold).
We live in a world of deception feeling that our property is an asset. But if our property is only helping us to accumulate more liability it cannot be an asset.
Real estate property is as asset when we earn rental yield out of it. When we buy a real estate property we shall not focus on what will be its value after say 5 years. Better is to concentrate on real returns. The real return is rental income.
By focusing on rental income, we need not bother if the price of our property is going up or down. No matter whatever is the market conditions, people will continue to live in their houses and will pay rent.
Buying property with best rental yields is the TRICK.
Self occupied house is not an asset. But a property which is earning you monthly rental is your asset.
If Net cash flow of ‘EMI paid’ and ‘Rent Earned’ is negative, then the property is not an asset