Investing money has two basic objectives: income generation and wealth creation. Income and wealth shouldn’t be used interchangeably; these are different concepts and purposes vary.
INCOME GENERATION
Income generation is often required for a near-term goal as well. Ideally, regular income needs to increase with time and hence, being invested for too long in a fixed-rate product without enhancing returns is not the best choice. Another source of income can be rental from property. Rentals are a small percentage of the market value of a property and with time there is usually a steady increase in the value due to inflation. Dividend received from equity shares, is an other example of income.Income refers to a regular and consistent stream of money, which can be in the form of salary or return on investments. In case of the latter, typically, income can be generated from investments in fixed income securities that have a defined payout. Your investment in fixed deposits or bonds goes towards income generation. Usually, this stream of income has a high degree of certainty attached to it. Then there are also very long-term products, such as tax-free bonds that will mature in 10-20 years, pension fund investments (Public Provident Fund or Employees’ Provident Fund) or insurance-linked pension plans.
Income can be used towards daily expenses and other known payouts. So, unless you have a large corpus to begin with, it’s difficult to use only income generating investments to cater to large expenses for the future. For this, one has to look at wealth creation.
WEALTH CREATION
Wealth refers to the market value of all your assets. This basket can comprise of assets such as equity shares, gold and even real estate.
For creating wealth, you have to hold assets for long periods of time, say, 5, 10 or more years. There is no defined period for wealth creation nor a defined quantum. How much wealth you create depends on the quality of the asset and the price others are willing to pay for it. As value of assets increases with time, a good quality asset, held for a longer duration can create a lot of wealth.
For goals such as retirement, income generation is not sufficient as money earned through specified-return products rarely beats inflation in the long run. It is wealth creation that is able to grow your money faster than the value that inflation eats away.
However, unlike income generating securities that come with certainty in the near term, asset values can be volatile and hence, wealth creation is a risky proposition. This smoothens out if you hold on to your asset for longer periods of time.
A balance of income and wealth creating assets needs to be maintained in one’s portfolio. Cash kept in your house or in the bank neither generates income nor creates wealth; invest it products that will fulfil either of the two needs.