Unlock Financial Freedom: 5 Best Investments for a Stress-Free Life

Financial freedom, for me, is about taking control of my life and emotions, independent of others opinions or external events. Make Money Work for You, Not Control You. This blog marks a step towards achieving this freedom, but it’s just one of many steps on the journey. I invite you to join me as we strive towards financial independence together.

Financial freedom is vital for a stress-free life, and investing in the right assets is the way to achieve it. If your investments aren’t growing at least rate of 12% annually, it’s time to rethink your strategy. In this blog, I’ll discuss five key assets for securing your financial freedom. I’ll also share the best way to distribute your investments among these assets for maximum benefit.

Let’s begin!

Equity/Mutual Funds

Although stocks can be seen as risky due to their fluctuations, they play a crucial role in growing wealth over time. If picking individual stocks or mutual funds makes you nervous, consider index funds. They’re affordable and tend to perform well. Studies show most mutual funds don’t beat index funds. Diversifying across large-cap, mid-cap, and small-cap index funds helps manage risk and take advantage of market growth. Always talk to a financial advisor before investing.

For reference, here are the Compound Annual Growth Rates (CAGR) from each index fund:

Large Cap Index Fund: [CAGR] ~ 14.6%

Mid Cap Index Fund: [CAGR] ~ 16.9%

Small Cap Index Fund: [CAGR] ~ 20%

These figures provide insight into the historical performance of each index fund and can aid in making informed investment decisions.

Indeed, short-term market ups and downs are normal in investing, like the Covid-19 crash and the 2008 housing bubble. Yet, history shows that markets have always bounced back over the long term. That’s why it’s crucial to see equity investments as long-term commitments. While short-term fluctuations can be unpredictable, sticking to a long-term strategy is vital.

Discover How to Begin Investing in Equity: A Step-by-Step Guide in Our Latest Blog Post – Mutual Funds Or Direct stock buying: Which is best you?

Real estate

Real estate is a popular investment, but high costs can be a barrier. When thinking about buying an apartment, consider its purpose. If it’s for living, it’s not usually a good investment. But if it’s for renting out, it can work.

The key thing to think about is how easy it is to sell. In places like Bangalore with lots of new projects, selling might be slow, affecting how quickly you can get your money back. Also, rental income might not cover the high loan costs.

In short, investing in apartments for renting might not be wise in places where selling is slow and rent doesn’t cover loan costs. Check the local market and think about the risks before investing.

There are different ways to invest in real estate.

• Residential Properties: Apart from apartments, one can invest in single-family homes, duplexes, or townhouses for rental income or appreciation.
• Commercial Properties: Investing in commercial real estate such as office buildings, retail spaces, or industrial properties can yield higher rental income, though they often require larger initial investments.
• Real Estate Investment Trusts (REITs): REITs are companies that own, operate, or finance income-generating real estate across various sectors. Investing in REITs provides exposure to real estate without direct property ownership and offers liquidity through stock exchanges.
• Agricultural land: Agricultural land is a physical asset with intrinsic value, providing stability to your investment portfolio. Renting out the land to farmers can generate a steady stream of income, offering a passive revenue source. Agricultural land can be less liquid than other investments, making it challenging to sell quickly if needed.

Gold

Investing in gold is popular because it’s perceived as a safe method for safeguarding your money. Unlike paper money, which can lose value if governments print too much of it, gold keeps its value well over time. It’s rare and valuable because it can’t be created. When the stock market goes down, gold often goes up in price, which helps to balance out losses in your investment portfolio.

Gold is also easy to turn into cash when you need it quickly. If you have gold, you can sell it easily in emergencies to get money fast. Plus, you can use gold as security for loans from banks, which often come with lower interest rates compared to other types of loans. So, having gold can provide you with a backup plan for financial emergencies and borrowing if necessary.

Although gold prices can go up and down in the short term, over the long term, they usually go up. Historically, gold has given returns averaging around 8-10% per year, which is higher than the usual increase in prices of goods and services (inflation). This means that investing in gold has often been a good way to make your money grow over time.

There are different ways investors can buy gold. You can buy physical gold like bars or coins, or you can buy digital versions like through exchange-traded funds (ETFs) or digital platforms. Each option has its own pros and cons, so you can choose the one that fits best with what you want to achieve with your investments and how much risk you’re comfortable with.

Physical Gold

Investing in physical gold can take various forms, including purchasing gold ornaments or gold bars. Each option comes with its own set of considerations.

Gold ornaments are often subject to additional charges such as making charges and wastage, which can impact the overall cost of the investment. However, they may hold sentimental or aesthetic value in addition to their intrinsic worth.

On the other hand, investing in gold bars can be a more cost-effective option as they typically incur fewer additional charges. Gold bars also offer ease of storage and transportation compared to ornaments.

It’s important to note that when purchasing physical gold, there are regulatory limits on the amount that can be bought without attracting undue attention from authorities. Exceeding these limits may trigger inquiries or scrutiny from regulatory bodies.

Indeed, investing in digital gold offers a convenient and accessible alternative to traditional physical gold purchases. Here’s how digital gold works:

Sovereign Gold Bonds (SGBs)

Sovereign Gold Bonds (SGBs) issued by the Reserve Bank of India (RBI) in consultation with the Government of India provide an alternative investment avenue for those interested in gold. Here are some key points regarding SGBs:

Upsides:

• Interest Income: SGBs offer a fixed interest rate of 2.5% per annum, payable semi-annually. This feature makes them attractive for investors seeking regular income in addition to potential capital appreciation.
• Tax Benefits: Capital gains on SGBs at maturity are completely tax-exempted, providing a tax-efficient investment option.
• Sovereign Guarantee: SGBs are backed by the Government of India, providing a high level of safety and security for investors’ capital.
• Regulation: Being issued and regulated by the RBI, SGBs are subject to stringent regulatory oversight, reducing the risk for investors.
• No GST: Unlike physical gold, there is no Goods and Services Tax (GST) applicable on the purchase of SGBs.
• Collateral: SGBs can be used as collateral to obtain loans from financial institutions.

Downsides:

• Illiquidity: While SGBs can be sold in the secondary market before maturity, doing so may attract taxation on capital gains. This lack of liquidity can be a drawback for investors needing immediate access to funds.
• Conversion: SGBs cannot be converted into physical gold, limiting flexibility for investors who prefer tangible assets.
• Lock-in Period: SGBs have a lock-in period of 8 years, which means investors cannot redeem them before maturity without incurring penalties. Additionally, there is a minimum purchase requirement of 1 gram.

Overall, SGBs offer a unique combination of safety, income, and tax benefits for investors looking to add gold to their portfolio. However, investors should carefully consider their investment objectives and liquidity needs before investing in SGBs.

Investing in digital gold offers a convenient and flexible way to access the benefits of gold ownership. Here’s a breakdown of the upsides and downsides of digital gold:

Upsides:

• Convenience: Digital gold allows investors to buy and sell gold online, offering convenience and accessibility from anywhere with an internet connection.
• Low Investment Amount: Investors can start investing in digital gold with as little as Rs 1, making it accessible to a wide range of investors, including those with limited funds.
• High Purity: Digital gold typically offers gold of 24 karats purity, ensuring high quality and value for investors.
• Secure Storage: Digital gold is stored in insured vaults by the seller, providing security and peace of mind to investors.
• Option for Physical Delivery: Investors have the option to convert their digital gold holdings into physical gold at any time, providing flexibility and tangible asset ownership.
• Collateral for Loans: Digital gold can serve as collateral for online loans, allowing investors to leverage their gold holdings for financial purposes.

Downsides:

• Maximum Investment Limit: There may be a maximum limit imposed on individual investments in digital gold, typically around 2 lakhs, which could restrict larger investments.
• Lack of Regulation: Unlike traditional financial investments, digital gold platforms may not be regulated by entities like the Reserve Bank of India (RBI) or the Securities and Exchange Board of India (SEBI), potentially exposing investors to higher risks.
• Making Charges: Digital gold purchases may incur making charges, which could reduce the overall return on investment compared to physical gold purchases.

Overall, digital gold offers a convenient and accessible way to invest in gold, but investors should carefully consider the limitations and risks associated with this form of investment before making any decisions.

Insurance

I know many must be wondering why insurance in asset class, bear with me and I’ll clear your doubts. Investing is crucial for building wealth, but insurance plays a vital role in protecting your family against unexpected events. It acts as a safety net, ensuring financial security if something happens to you prematurely.

Two key insurance types to include in your portfolio are life insurance and health insurance. These policies help your family manage expenses and maintain their quality of life, even in the face of adversity.

1. Term insurance – Term insurance is crucial. Get a policy that covers 6-8 times your annual income. This ensures your family is financially secure if something happens to you. It’s vital to educate them about finances too.
2. Health Insurance – Health insurance is a must-have for your family. Choose a reliable insurer and opt for a policy that increases the sum insured by at least 10% every year. Medical costs rise over time due to inflation, so it’s crucial to have sufficient coverage. For instance, if you start with a 10 lakh policy at 30, by the time you’re 50, it may not be enough. But with a 10% annual increase, it could grow to around 73 lakhs, ensuring your medical needs are adequately covered.

Insurance acts as a safety net, protecting your family if things don’t go as planned. Think of it like a backup plan—a Plan B—to cover any unexpected events. Whether you see it as an investment in your portfolio or not is up to you. What matters most is having the security it provides for your family’s future.

Cash Equivalents

It’s essential to keep a portion of your assets in cash or cash equivalents. This provides a financial safety net for emergencies. Additionally, investing in the right cash components can generate passive income. Having cash on hand ensures you’re prepared for unexpected expenses and can take advantage of investment opportunities as they arise.

Fixed deposits (FDs) or certificates of deposit (CDs)

Fixed deposits (FDs) or certificates of deposit (CDs) are excellent options for keeping cash reserves. Here’s why:

• Financial Security: Keeping 6-12 months’ worth of expenses in FDs or CDs ensures you have a safety net for emergencies. These investments offer a stable and predictable return, typically around 5-6% per year, providing passive income.
  • Liquidity: FDs and CDs offer the flexibility to withdraw funds when needed, making them ideal for addressing unexpected expenses or financial emergencies.
  • Low Risk: FDs and CDs are considered low-risk investments, as they are typically offered by banks and financial institutions with a high degree of stability and reliability.

By maintaining a portion of your assets in FDs or CDs, you can strike a balance between safety, liquidity, and passive income generation, ensuring you’re prepared for any financial challenges that may arise..

Government bonds

Investing in government bonds is a smart move for several reasons:

• Steady Income: Government bonds typically offer a fixed interest rate, providing a steady income stream. With interest payouts ranging from 6-7%, they can be a reliable source of passive income.
• Potential for Capital Appreciation: While bonds are known for their stability, their prices can fluctuate based on changes in interest rates and market conditions. Investing in government bonds provides the opportunity for capital appreciation, where the bond price may increase over time, leading to additional returns when the bond matures.
• Safety: Government bonds are considered one of the safest investment options, as they are backed by the government’s creditworthiness. This makes them a low-risk investment choice, suitable for preserving capital while generating income.

By including government bonds in your investment portfolio, you can benefit from their attractive interest rates, potential for capital gains, and overall stability, enhancing your overall investment strategy.

Conclusion

Maintaining right ratio of investment is key to get optimal returns. One should always readjust their portfolio every 2 years. Each person will have their risk averse, and I leave this decision to individuals, below table can be considered as reference in building portfolio with optimal returns.

Asset Type	Percentage in portfolio	Return	Holding period
Equity/Mutual funds	40%	14-15%	Min 15 years
Real Estate	30%	10-12%	On need basis
Gold/Bonds	20%	7-10%	On need basis
Insurance	NA	NA
Cash	10%	4-6%	On need basis

The average return is about 12%, which is higher than inflation. Adjustments based on individual risk tolerance will be discussed in future blogs.  

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