Managing Wealth in 21st centuary

21st century labor is of time share base. One gets paid for the hours of work or the quantity produced. That leads to complexity of money management. As you earn, you have to save. The pensions or money for post retirement are one’s own responsibility today. Central Government has been directing individual’s income into some saving instruments under the disguise of Income Tax exemptions/deductions. This is not available for NRI who has only overseas income. Although tax exempt by virtue of NRI money, he also needs to plan his wealth creation as he progress in career & income.

Again lifestyles have changed; income levels and the uncertainties accompanied with the salary also have undergone tremendous change. All these points to the need for planning one’s hard earned money to create wealth to meet life needs. This is not hard core capitalism of ‘Sherlock’ story. One can plan for creating social responsibility outfits in the form of Trust/Non-profit company to further some cherished charitable/religious/social objectives. This is an attempt to provide a beginning point for newly employed regarding wealth creation.

Income Groups are defined as 30,000; 40,000; 60,000 and 80,000 apprx on a monthly basis.

Living expenses consists of charges for utilities like rent(if you are in a rented house), electricity, water, telephone bills, newspaper, land/building taxes, waste clearance, cooking gas, etc.. - Necessities of life.

Lifestyle expenses means costumes/cosmetics/club expenses that goes with the society in which you live. A metro family is spending about Rs 2500 pm on cosmetics alone.

Family is defined as 2-3 children and both parents. You are on a short commission stay for 10 years at abroad. India growth story has created plenty of 15-20,000 pm opportunities. People in 30000-40000 group is assumed to be saving same amount of money pm in absolute terms.

Somebody able to save Rs 10000, 20,000, 30,000, 40,000 as the case may be in India after meeting living expenses, lifestyle expenses emergency expenses and insurance premiums have been taken as examples.
At the lower side of income, I have assumed persons to be more risk averse and as the income level increases risk averseness decreases. The level of returns available from instruments prevailed in the current market situations at the rate of compounded annual growth rate(CAGR) per annum are taken for forward projections. As NRI investments are non-taxed, I have not provided for the same in my calculations. Please note that there is no guarantee that these rates will prevail when you want to invest. Nevertheless it gives you a indication how things can work out in future and you can navigate through a variety of plans. Although Debt Mutual fund MIPs are giving 16-18% recently, the moderate rate of 12% only is applied in the projections taking into consideration of long term future and uncertainties associated with it.
I have not included asset classes like ETF, Commodities, Gold, Land, Collectibles(antiques etc..) also invaluable relationships that make our life on earth most happy and comfortable. Now a days, increased interest in ETFs and Commodities are also seen. With sweeping changes happening in the Indian bonds market and also the new varieties of derivatives getting added in the futures/options markets, investors in India are surely going to face lot of volatilities.

The comparative return from investing in different asset classes in India is as follows:

During 1980-2006 the BSE ensex has given 17.9%; The BSE Sensex has given 18.15% returns on a compounded annual growth basis during 1991-2007.


However to project next 10 years Mutual fund returns, the rate used is 18% pa. The Chitty is an important saving instrument for Malayali. But the fact remains that we do not have a rating system for the Chitty. Therefore I have not included it in my spread of investment universe. However, when you are saving Rs 1000 or Rs 500 KSFE, PORD, Bank RD are all become handy. Be careful about private chitty funds. Unless you have first hand evidences to believe a private chitty do not get involved.

That is on a 10 year spectrum, banks offer 8%pa as maximum. Corporate bonds offer rates from 8% to 16% depending on ratings range from AAA to other end of the investment grade. BSE Sensex, the barometer of equity markets of India has offered as low as -23.75% in 2000 and as high as 72.55% in 2003. The compounded annual average rate for 1997 to 2007 works out to be 18.15%pa. Gold gives about 8-12%pa.

Among 58 diversified equity funds that have completed 5 years, we find that the return ranges from as low as 36.92% to as high as 71.35% in simple terms. Such a vast difference in earnings is created by the themes the funds concentrated. Here you may need assistance from a qualified advisor to select what kind of a theme you should look for. Similarly 11 index funds have offered return from 37.93% to 43.69% in a much narrower band than diversified equity class during the same period. The compounded annual growth rates may be a few points down.

Taking the most pessimistic approach on the most risky equities class, I have projected the growth of your investments in equity @ 18%pa to provide for falls as in year like 2000. Recurring route is the manthra to build up fund corpus to meet life needs like purchase of a car, house, provide for professional college fees, to create a fund for post retirement life etc.. But when you are saving for retirement it is for 30-35 years plan and so better to go for balanced funds. But for other purposes for a time frame of 10-15 years, all equity is also ok. After all the composition of debt: equity depends on your risk profile. To decide about asset allocation, as a rule of thumb, you can use your age as the percentage of your savings that will go into debt. Debt portfolio will include, Post Office RDs, Bank RDs, SIPs in Debt MFs.


The problem with PORDs and Bank RDs is the re-investment risk at maturity. Normally, they provide RD for 5 years only. So after the initial five years you will have to collect your maturity proceeds and re-start another RD or FD for the remaining period depending on the prevailing interest rate. if the interest rate has moved up at the time of re-investment, it is to your benefit, otherwise the maturity amount left after completion of entire plan period of 10 years will be lesser than initially planned out. Again another problem is about the human nature of dealing with money. The moment money reaches you in cash form, you will be tempted to use it for several compelling reasons without investing it for the remaining plan period. As a rule of thumb, one can use debt instruments to plan for short term needs(needs within 3-5 years) and equity for higher term needs.

For an ordinary worker earning about Rs15,000 pm can save say about 25% of his salary into an SIP of an index fund for a little more than 19 years to create a corpus of 1 crore provided, the scheme is earning 20%pa. But if the earnings rate is not steady and falls to 18%pa, then he will have save for a bit more than 20 years to create the same amount.


Risk averse guy who save 10,000 rupess pm with a debt inclination of 40% makes Rs.26.5 lakhs at the end of 10th year. But the one who is lucky to send Rs 20,000 rupess pm, with 30% debt inclination makes it to Rs.58.2 lakhs The hi-end salary group is able to send Rs 30,000pm. Their accumulated corpus at the end of 10 years following a 20% debt style is a bit shorter than a crore of rupees. To enhance your wealth plan your short term life needs with debt and long term (beyond 5-7 years ) with equity.



Read the full article on how to plan Wealth Creation for 21st Century published in COGNIZANCE a Research Journal published from Commerce Dept of St. Alberts College, Ernakulam. As you get a fresh job, youngsters have lot of expenses; lot of dreams to realise. The article helps to plan sensibly. As an indicator you may recall Kautilyas rule of thumb: Operational expenses for tax collection should not be more than 20% of the collection. Use the same anlogy in your case:spend not more than 20% of your pay for maintaining that job(including life style expenses).