5 Simple Steps to Help You Achieve Financial Freedom Through Investing

Financial freedom is something we all aspire to achieve. Simply put, it is about controlling your finances so you can live life worry-free. It’s not about being rich but having control over your present and future regarding money matters. Investing is among the several ways you can achieve this all-important goal.

Achieving financial freedom through investing

Money lying idle does no good. You need to invest it to grow in different financial instruments according to your goals and risk tolerance. Every prudent investment brings you closer to your goal.

1. Start early to harness the power of compounding

Being an early bird reaps goes a long way in helping achieve financial freedom. Figure this. If you want to retire, let’s say, by 60, and start investing Rs 5000 per month in a mutual fund offering 10% annualised returns from the age of 25, your corpus could be Rs 1.9 crores by the time you turn 60. If you delay this by 5 years, it comes down to Rs 1.13 crores.

Starting early helps you harness the power of compounding, which has a multiplier effect on wealth creation. Compounding reinvests the interest earned, which can help you build a significant corpus, especially for long-term goals like children’s higher education and retirement.

2. Have the right dose of equities

True, equities are a volatile asset class. However, it’s there for the short term. In the long run, equities have the potential to deliver returns up and above inflation, which has a decompounding effect on wealth creation. A report in 2023 found Indian equities delivering 17% returns in 20 years . Prudent investment in equities can not only help you counter inflation but also ensure you can accumulate a sizable corpus to address your needs hassle-free.

You can invest in equities in two ways - through direct stocks or via mutual funds. If you have the knowledge and time to track markets and companies, go for the former. Otherwise, you can opt for mutual funds managed by professional fund managers.

3. Have an emergency corpus

Your journey to financial freedom can hit a roadblock due to any contingency. A sudden job loss or a medical emergency can throw even the best-laid plans into disarray. Therefore, it’s vital to be emergency-ready and invest in liquid instruments which you can easily convert into cash when needed.

Though having an emergency corpus equivalent to at least six months’ expenses is recommended, it’s wise to have at least a corpus worth a year’s expense to have a long rope. You can invest in liquid or ultra-short-term debt funds for an emergency corpus.

4. Diversify well

Diversification is a fundamental investing principle and an essential risk mitigation tool. Invest across asset classes to avoid concentration risk and benefit from different financial instruments. Note that market events affect different asset classes differently.

Optimum diversification balances your portfolio and helps you sail through tough times. It protects the gains made over the years from being wiped out by market volatility.

5. Rebalance periodically

Your investments should evolve and change with time. It can’t be constant. Therefore, you must periodically review your investments and rebalance them if needed. For example, when you are young, you can take more risks by investing in equities.

However, as you age and move towards retirement, it’s wise to taper your equity exposure. Similarly, if an asset has underperformed for a significant period, find out the cause of underperformance and weed it out, if necessary. Periodic rebalancing ensures your investments are in line with your goals.

Wrapping it up

Achieving financial freedom through investing warrants patience and discipline. Approach it like a marathon and not a sprint. A well-thought-out investment plan can help you achieve financial freedom and ensure you achieve all your goals with ease.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.