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5 ways your money can make you rich
Kapil Malhotra
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August 23, 2007

Most of us believe that income and wealth are the same; we often loosely say that somebody is rich because s/he has an income of so much per year. That isn't strictly true. 'Rich' is about wealth, and income may have nothing to do with it.

For instance, if you have a high income but spend it all, you might have a high-spending lifestyle, but clearly your wealth won't grow.

Instead, you grow rich by making your money work harder and smarter for you.

First, count your money

Do you know how much money you have? I mean, really know; not vague ideas and notions but know how much you have, more or less on your fingertip?

Hopeful entrepreneurs approaching venture capitalists for funds to fuel their business dreams are advised to get their "elevator pitch" down pat. This means that they ought to be able to "sell" their business proposition within the 2 or 3 minutes that a typical elevator ride takes. To make a convincing elevator pitch, it's obvious you must know the pitch known as well as the back of your hand.

Similarly, before you can set your money to make more money for you, you must first know how much you have - and in what form. Sounds like common sense, right? But, do you really know?

Most of us don't. If you do, well, you are an important step ahead.

Activate lazy money

To take just one example, how much money is lying fallow in your bank savings account, for example? Earning the lowest of interest rates going? And, why? Chances are it's a result of simple inertia.

Anything more than a few months of your monthly expenses lying in savings accounts is lazy money. Repositioning any excess money even into a no-brainer such as bank FDs will smartly perk up your returns.

Moving up the ladder of higher returns

Having activated lazy money, you are then ready to tackle the adrenalin-rush question: How to get higher returns from your money?

Instead of bank FDs, for example, you could opt for equally safe but higher return options, such as post office savings schemes, saving certificates, and government securities and or fixed maturity plans of mutual funds.

The real leap in your quest for higher returns, however, comes from a move into the world of "risky" investments: equity and property, to name two popular avenues.

Typically, such a leap to equity would at least double your returns, say from 7 per cent to 19 per cent per year. (The Indian stock market returned about 19 per cent per year in price appreciation plus dividends when smoothed over the last 12-15 years.) Not impressed?

Well consider this: Rs 10 lakh (Rs 1 million) invested at 7 per cent will grow to less than Rs 20 lakh (Rs 2 million) in 10 years.

The same modest Rs 10 lakh invested at 19 per cent morphs into an unbelievably larger Rs 55 lakh (Rs 5.5 million)-plus - almost triple the amount from "safe" investments.

Sure, equity and property investments come with some risks that bank FDs, savings scheme, etc. don't.

But there are ways to keep such risks within your comfort zone. What is important to understand is that the road to making more money with your money passes, inevitably, through investing in higher earning avenues, typically, shares and equity mutual funds and property.

Tax smarts

In squaring the circle of higher returns, you also need to grasp some simple tax-smarts.

The big-bucks tax break currently available is from investing in shares or equity mutual funds, and holding these for at least 12 months. Any gains you make after selling them after 12 months qualifies as long term capital gains and are completely tax free.

This is perfect because the big returns from equity in any case come from price appreciation over a period of 3 to 5 years. When you hold shares for such a period, you don't have to pay any tax at all, irrespective of your capital gains, whether it's a few lakh or a few crore!

While investment in property isn't quite as tax-efficient but significant tax breaks are available for buying a residential house, for example.

Review, review, review

Finally, once a year, review all the first four steps, and do so year after year. You would be pleasantly surprised by the results.

Simple enough, no? But, then, simplicity is the inherent beauty of all fundamental principles.

Kapil Malhotra is an alumnus of Indian Institute of Management, Ahmedabad and a specialist publisher and editor of Investment books.

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