Using Automation to create more Wealth

 Couple of weeks back, Microsoft backed Open AI came with its latest version of the AI Tool - ChatGPT-4o. Everyone's already excited about how this AI tool is going to make their work and life more easy and efficient. Given the context, It got us thinking  - Are there automation tools that help us create more wealth ? That will make our investing more efficient ? That will make our life more easy. Can AI /Automation help us finally discover the holy grail that will make us super-duper rich?  

 Like all comman men, we saw if it can help us find the best mutual fund? or find that exciting Option Strategy ? or give a formula that can help me find next Infosys, Reliance or HDFC Bank? or help me do Algoritham trading that has made crores of rupees for Institutional investors? or heck can it atleast help me buy a "Winnable lottery ticket?  We realized that they may or may not give us the answers we seek but for assure none of these guarantee success. 

Then common sense dawned, the automation tools needed to make us wealthy have always been there but just out of human tendency, we keep searching for something fancy that can miraculously make us more money and also because like Warren Buffet said -  "Because nobody wants to get rich slowly", we are all in search of the "SPECIAL TOOL" ignoring what is in hand already. Well those special automation tools are - 

Systematic Investment Plan (SIP) - This is the most effective and best Automation tool ever to start one's investment journey IMHO. People always confuse SIP with Mutual Funds but as the abbreviation suggests it is just a organized way of Investment, one of the oldest form of SIP is Recurring Deposit where we invest a fixed amount on fixed date of the month for a fixed period, you see everything from Time, Amount, Interval of Investment is organized, hence it can be called a Systematic Investment Plan. So is the case with Gold Chit fund but SIP works wonders mostly with equity mutual funds.

Having a SIP helps us in being - 

  • commited to saving our money
  • free of emotions when price of one asset class goes up when others remain subdued.
  • staying invested in market for long period hence helping reap the benefits of Compunding
Hence a simple SIP started in a well managed equity portfolio can gradually grow into a huge corpus where investments are made automatically. In absense of SIP, there are good chances that our emotions will swing with market movements and the chances of us creating corpus are very slim. 

Systematic Transfer Plan (STP) - Well this is very unique to Mutual fund industry and again is a wonderful Automation Tool which helps the Investors in trasferring their Investments from one asset class to another based on certain rules. Let me give you couple of examples where STPs are very useful. 

Investors having seasonal earnings - You see everybody does not have a constant source of income, some people earings' are seasonal like a wedding photographer, farmer, textiles businessman. All these people will earn their incomes during peak season and for the rest of the season, thier incomes are inconsistent to be doing a systematic Investment. For such Investors,STP is a wonderful tool. STPs takes the seasonal earnings from them and systematically transfers the investments to equity mutual funds to achieve similar purpose as SIPs. This also solves the biggest problem most of us have - That If we have a lumpsum money in hand we will spend /commit it in someplace, by taking the lumpsum from investors and investing in risk free debt funds while gradually moving them to Equity Mutual funds

Investors who have created a Corpus - There are investors who have created good corpus through SIP and are worried that at market peaks, they are fully invested and any fall will impact their corpus badly. STP is a wonderful tool for them as well since they can transfer a portion of their Corpus systematically to a limited risk fund as Markets go up reduding their exposure to market peaks and similary switch back to risky funds when Markets correct a 1000 points or by some percentages. This way, the portfolio can be managed according to Investor's comfort without having to completly stay out of market.

Now the climax... 

Systematic Withdrawal Plans (SWPs) - Not that the other two plans are less mortals but I feel SWP is the greatest Automation tool for investors when they are keen to generate income from the investments they have accumulated over a long period of time or any lumpsum corpus they get on sale of property or gratuity on retirement etc., 

So what are SWPs? These are set ups in which an investors invests a lumpsum amount and withdraws a fixed amount, on a fixed day at regular intervals like monthly, Quaterly so on! 

Illustration below - Lets says Mr. A got a lumpsum of 50 lacs for any of the above reasons and wants to use that money to create a constant source of income. Traditionally they are 2 ways to do it - Buy Real Estate which will yield a rent that will serve as constant income or Invest in fixed deposit instruments that yield a fixed return. 

Below is the the return profile of both - 

Couple of things here - 
  • In the case of FD/debt instruments, the captial does not grow. So years later 50 lacs remains as it is while inflation eats into its real value. 
  • In case of Real Estate, there is growth in the principal value but what we have seen in case of rent yielding estates, the growth is not more than 7%. so the total return can be assumed as 10% ( 3% plus 7%)
Here's the updated table with end value of the 50 lacs invest made (say after 15 years) - 
Now then we know the source of Investment and average returns, lets see how a SWPs fare in contrast to these - 
Observations - 
  • We have assumed a 12% return from SWPs
  • Though it is only 2% higher than real estate, it is be noted the end value is higher equal to Principal invested. That is by 50 lacs. 
The Reality -

A good investor will quickly ask - The SWPs retruns are assumed, show me the real data, so for those curious souls, below - 
* Fund names hidden
  • We have just taken the oldest funds we know that are suitable for SWPs and plotted the same data for 15 Years
  • The Returns are much higher that our expectations, ie., 4 Crores plus in each of the case
  • The data is just to show that 12% over a long term is certainly achievable if invested in a good equity portfolio and caution against expecting such huge corpuses. 

So right from starting to help you save small amounts systematically to helping you create a sizeable corpus to managing corpus by switching asset classes to enjoying the corpus by giving you not only fixed income regularly but also helping to grow the corpus, Mutual funds have all the automation tool readily available. It is upto the investors to use these Automation tools to make their wealth creation journey more effective and efficient. These are the one of the known holy grails that can make us super-duper rich!

For any financial Planning queries, Please contact Droplet Wealth at invest@dropletwealth.com.

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