Preserving wealth is as important as creating wealth

Wealth creation and wealth preservation are two sides of sustainable financial planning. While we focus a lot on wealth creation, wealth preservation is often ignored. The latter helps preserve the value of our investments while optimizing potential returns.

Wealth creation and wealth preservation

Investors invest with the view to generate returns and create wealth. However, no asset or portfolio is risk-free. Risk and reward are closely related and inherent to investing. Therefore, it is crucial to give thoughtful consideration to asset allocation to create long-term, sustainable gains. Only sustainable, long-term returns can truly preserve wealth.

An important factor when considering returns from an asset class is inflation. For example, in 2022, the average inflation rate in India was 6.70%. (Source: Business Today)

Your investments should give returns higher than the inflation rate for capital appreciation. Let’s say, you invested Rs.1,00,000 in an asset class with 6% returns. Your asset value stands at Rs.1,06,000 at the end of 2022, but the real value or the purchasing power of your investments erodes to Rs.93,300.

The above calculations are only for illustration purposes. The information given on Investment and rate of return are for the purpose on explaining the illustration only. These are not to be considered for investment advice or guarantee of returns. Investors are advised to consult their investment / tax advisors. To be used for illustrative purposes only.

The balancing act for long-term wealth preservation

Investors may be tempted to invest in high-risk, high-reward investments for wealth creation. But wealth preservation is a different ball game.

A look at the historical events shows that the pandemic, economic fluctuations and recession impacted the markets adversely and wiped out fortunes. For example, In Feb 2009, NIFTY 50 dipped to 2700 points, from around 6000 points in Dec 2007. Investors who did not focus on wealth preservation took signification losses.

Hence, a wiser approach here is diversification.

Debt funds for the balancing act

The key to wealth preservation is
1) Reducing the overall portfolio risk
2) Generating returns that help surpass inflation

That’s where debt funds come in.

Debt funds invest in fixed income instruments like government securities, bonds, and money market securities. Therefore, most debt mutual funds tend to be relatively less volatile. For instance, when the market is volatile, equity funds may underperform. However, since the debt funds invest in money market securities, they have the scope to generate potentially stable returns. So, debt funds play a vital role in balancing their risk-reward profile and protecting wealth.

Preserving wealth is therefore as important as wealth creation to achieve your dreams.

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