Equity market is your best bet for early financial freedom

“If you don’t find a way to make money while you sleep, you will have to work until you die.”
Warren Buffet

The above-mentioned quote highlights the importance of being financially independent. For that, the only option is to make your money work for you. However, considering the impact of inflation, it is not enough to earn meagre returns that are generated by your fixed income instruments.

Considering the current inflation rate of 6.25% (as of July 2021), investors are, in fact, losing their money, with interest rates on fixed deposits being lower than the rate of inflation.

In this situation, it is quite clear that interest earned on fixed deposits is simply not enough. And, investors must find different investment avenues that can help them beat inflation and create wealth as well.

Why stock market

The stock market has comfortably outperformed all the other investment avenues – be it gold, real estate, or debt instruments – over the long term. Since its inception in April 1996, Nifty has climbed from 1,100 points to 16,000 in 2021. During this journey of 25 years, the index has delivered a 12% CAGR returns, gold being the second-best. At the same time rate of interest on all the other safe instruments like fixed deposits, PF, Kishan Vikas Patra, etc., has constantly declined.

Even more amusing is the fact that Nifty’s 12% CAGR returns are only a benchmark. The stock market has the potential to deliver far higher returns based on an individual’s level of skills. Warren Buffet, for example, has generated 21% annual returns over the years. A lesser mortal could generate returns in the range of 13-15% with patience and the right stock selection.

Time and power of compounding is the key

Time spent in the market is a crucial factor that an investor must account for. When it comes to investing, the earlier you start, the better it is for you. Starting early gives your money more time to grow.

If you start investing Rs 20,000 a month at the age of 30 in an option that gives 12% compounded annual returns, you will have a corpus of Rs 7 crore at the age of 60. However, if you start investing at the age of 40 in a 12% CAGR scheme, you will have to invest Rs 70,000 a month to accumulate Rs 7 crore by the time you turn 60.

Conclusion

Achieving financial freedom sets a person free to live a life of his/her choice and carry all the responsibilities with relative ease. For that, working until you die is not a very wise option.

(The author is CIO, Teji Mandi. Views expressed are personal.)