Why the Rich Never Do SIPs (What they Do Instead to Build Assets for FREE)

We've all heard this line, start an SIP of just 5,000 rupees a month and one day you'll be rich. Now, it's the most common advice every bank, mutual fund ad, and finance influencer basically gives. And yes, SIPs are a powerful tool for the middle-class investors.

But here's a secret trick that nobody tells you that rich people never do SIPs. Now, isn't that shocking? Let me explain why this is the case and maybe by the end of the discussion you'll understand exactly why the wealthy avoid sips [music] and why they do this instead.

So before we start the video I would love to thank grow because we are now officially a part of the grow network and because of them we are getting you such amazing content out for you guys. So definitely do check them out. In India SIPs are a massive industries over 20 lakh cr in assets by some estimates.

Asset management companies love SIPs because that gives them predictable monthly inflows. They bring in predictable cash every single month and fund houses can count on that steady stream of money to manage and invest. That is why the set and forget behavior comes in because once you set it up, you rarely stop it and even if the market is down, you will continue to do this.

This means the fund companies will keep getting your money in good times and in bad times. [music] And the third is that it appeals to safety and discipline because for the middle class it feels safe because it's a systematic and automated investment program and SIPs basically enforce investing discipline for people who might otherwise not invest regularly. So that is why SIPs are sold as a onesizefitit all solution for everyone.

But for the rich it makes very little sense and that is why you don't see extremely wealthy people doing SIPs. And let's understand why this is a big problem for the wealthy. Now let's do some math that is usually used to pitch SIPs.

Assume you start an SIP at 50,000 rupees a month at 12% annual return. After 20 years you will have about 5 crores. After 30 years that could grow to around 18 crores which is not bad at all and that's the dream everyone sells you.

Small monthly investments snowball into a fortune over a decade. So what is the issue with this Shashank? Now the problem is if you already have 5 10 crores today why would you wait for 30 years and wait for a sip to actually grow into a big amount because for the wealthy time is more valuable than squeezing out 12% annually on small monthly contributions.

They rather deploy large chunks of money now to get bigger results sooner instead of waiting for decades for compounding to actually work for them from a relatively small base. Another big important reason for the wealthy is liquidity and flexibility. Sips lock you into a disciplined schedule, which is great for someone who needs force savings, but discipline is not what the rich lack.

What the wealthy value more is flexibility and the ability to deploy their capital at a moment's notice into the best opportunities. If all their money is dripfed into mutual funds, they might miss a chance to buy a distressed asset or a bargain investment. And that is why they prefer lumpsum investments because they can put their money to work when actually opportunities come knocking at their door whether it is real estate, private businesses or even bonds.

And they do [music] this rather than drip feeding small amounts into the market on autopilot. And here's the bottom line. Sifs create wealth slowly from small amounts which is not a bad thing and it is great for the middle class salary but for the rich they prioritize large timely moves and immediate cash flows.

Now let me give you an example of middle class versus the rich. Now to really see the difference let's compare two individuals. One is Romesh who is a middle-class investor has a salary of 70,000 rupees per month and manages to invest 10,000 rupees per month in an SIP.

After 25 years at 12% keer, his SIP corpus grows to around 1. 5 crores. [music] And the 1.

5 crores is obviously life-changing for Romesh and it can fund his entire retirement and also remove most of the financial status that he has and the stress that he might have at that point. Now, SIPs can truly create wealth for him over the long period of time. But now let's look at another investor called Arjun who is a wealthy investor already has 5 crores in liquid assets today and he invests the full 5 crores in a mix of safe instruments let's say fixed deposits or bonds at a 7 to 8% annual return.

Now that yields approximately 35 lakhs per year in interest without him touching his principle of 5 to 10 crores. Now if he simply lets that 35 lakh per year compound or reinvests it in 25 years that 5 crores could grow over 27 to 30 crores and this is taking zero risk in markets. Now all this without Arjun ever doing a single monthly SIP he's using an existing large capital to generate returns directly.

So now do you see the difference for middle class starting from a small base sips are transformative but they slowly build the capital and the initial capital over a long period of time but for the rich their existing wealth itself is so big that it generates returns that might dwarf what a small monthly plan can do. So in summaries sips are a part to wealth for those who are starting out but for those who are already rich they have a different game to be played altogether. So now let's understand why does the rich actually prefer opportunistic investing versus SIP based investing.

Number one, what they do is they invest lumpsum investments in safe assets. Basically they allocate large chunks to relatively safe interestbearing assets. And that is why if you see the bond market you will see a lot of HNI investing in highly good AAA double A rated bonds which gives them fixed rate of return for a long period of time.

Now if somebody invests even 2 crores into this bond at a 7% interest rate that would yield approximately 14 lakhs per year in interest and these guys usually live a life which is not extremely extravagant. So for them 14 lakhs a year is absolutely great because it's reliable guaranteed cash flow even if something goes wrong. Next thing you would have noticed with a lot of HNI is they have a massive real estate portfolio.

Now I know a lot of influencers come and say that equity is better than real estate. But then why do we see a lot of wealthy people having so much real estate all the time. Now if an HNI buys a commercial property for 3 crores, it provides them anywhere between 6 to 8% in rental yield and that's 18 lakhs per year in rent.

Plus the property itself may appreciate over time. And rich investors often have multiple different properties like this where the rental income from each is so significant that they start paying off the EMI of the other rental assets. Now the best part is these assets are tangible and can be leveraged for loans or future sales [music] and real estate is one of the most favorite things that all of these rich people use and this is something that they tell the middle class to not do actually.

Now coming to investing and this is where serious wealth multiplication can happen. The rich often invest in something that we call AIFS or alternative investments. Now this is a very different type of investing whether you're investing in startups or private equity.

For example, somebody putting 50 lakh into a promising startup or growing private company if that business scales that 50 lakhs could suddenly turn into several crores quite instantly. And this is something that a lot of PMS fund managers do where they actually take the rich people's money and start investing it in preIPO funds or maybe two years before the IPO they start investing it there which gives them insane amount of returns. I myself had invested in one angel company in 2020 2021 and had invested approximately three lakhs into it.

Today that investment stands at 3 crores and I've done nothing in the last 4 years to deserve that kind of return. Obviously, I've not liquidated it yet, but this is how opportunities come knocking at your door. The basic understanding here is that these strategies have something in common.

One is flexibility and the other is scale. And the rich are not drip feeding 10,000 or 50,000 rupees at a time. Now let me tell you a very beautiful flywheel hack that a lot of rich people use including Bollywood actors like Amitab Bachan use this entire story and I call this the leverage play which is how do the rich build assets for absolutely free and this is one of the most beautiful strategies that you'll ever hear and it is completely doable by a common man like me and you as well.

So let me explain the whole process. The rich people use borrowings and leverage to actually make a lot of money. They don't invest their own money.

They use loans for every single thing. And that is something that a lot of these investors do. So first thing what they do is they go build an equity portfolio or a bond portfolio.

Okay. Let's say Amit who has 1 cr stock portfolio or 1 cr mutual fund or 1 cr worth of bonds. Instead of selling this bond or mutual funds that is growing at 9 to 10%.

What he does is he will go to the bank and pledge it which is called loan against shares. That means he's not going to pay any tax on this because he's not sold it. Now the bank says okay cool you have a 5 cr portfolio let me give you 3 crores or 4 crores in loan no problem go ahead with it.

Now they take this 3 4 crores and they go and invest in a commercial property not land not uh residential property they go and buy a commercial property. Now this commercial property usually gives a rental yield of 6 to 8% and the loan would come somewhere around 12 to 14% for a commercial property. Now every year there is an escalation for this commercial property of 10%.

So within 4 to 5 years the rental yield which would have gone from 8 to 14%, the monetary value I'm talking about and the loan amount would actually match and on year 6 year 7 the amount of money he's getting from rent because it's grown by 10% every year will become so much that he can easily clear this loan very fast. And in all this time, in all this time, your equity portfolio or mutual fund portfolio is still growing over the last 5 years at a 12% average. Now what he does is that exact 1 cr that he had pledged has now become 4 or 5 crores.

He will go to the bank again and he will again take a loan of around 2 3 crores on that and go invest it in another property, another commercial property at 6 to 8% average interest rate and wait for 4 5 years and that makes it a free property again for him. Now in all this time, not only his stock market portfolio growing up, his two real estate portfolios have also now become assets that are growing in value and giving steadystate income as cash flows which are also clearing the loan quite aggressively. Now in all this I have not even added the dividends that he's actually getting from the stock market investments as well.

So now you have three different sources of cash flow and three different hard assets. Number one is your stock as a hard asset. two commercial properties are hard assets which gives you capital gains.

Now if you talk about yield from cash flow perspective, I have dividend yield coming from the stocks which are around 1 to 2% every year and I have real estate yields coming at around 6 to 8% every year and these are all appreciating over time. So the dividends are also compounding, the property value is also compounding, the stocks are also compounding and you know the best part in all of this, they've not paid tax at all. Now let me tell you how they don't pay tax and this is what the rich people actually do when they go take a loan they actually create a private entity to go and buy these commercial properties.

Okay. So first things first let's say ABC limited will go buy this commercial property in the name of a loan. Okay.

So whatever income that comes into it because it's business income whatever income that comes into it goes as a part of loan. That means if my rental income is 70 and my loan would be obviously more in the start at around 1 lakh that means I'm already sitting at minus 30,000 in that company account after that my traveling expense me going and having food somewhere can all be expensed on this account now over time what happens is the money keeps going into this property and they never pay loan because at the profit after tax level will always be negative or zero. The minute they feel that they're going to become profitable, they go take another property, another asset, increase the interest component below in the profit and loss statement and so that the revenue and interest are always matching and they continue this flywheel over their entire lifetime.

So by the time they finish their lifetime, they would have five or six rental properties and every time they feel that this is becoming too much, they will go get another one so that they never become very profitable on that. At the same time, the stock market portfolio is also growing and they have never removed the money. At the same time, this is also growing and they've never removed the money.

So, completely tax-free legal flywheel has been created. At this point, the only tax they're actually paying right now is on the dividends that they get, which is the only thing that is taxed. Everything else is in the company account and that is going as interest.

So, they actually pay no tax at the end of the day. So, what has he done here? the rich people have essentially used the bank's money to buy the property and the property started getting rented and his stocks and dividends paid the bank back and all of this is a new free asset for him and he does not have to pay a heavy amount of tax on it and all he's doing is building these assets over time and within the next 10 to 15 years he has built a massive asset pie now yes this is also replicable by any common man in India but is there effort into this Yes, there is effort.

There is uh you need the upfront money. You need to first build a base of so much capital that you need to go and pledge it to the bank. Number three, you need one guy to manage all of this.

But if you look at it from a really macroeconomic standpoint or if you look at it from a long-term perspective, it is possible. And it's not just Amitab Bachin. Even stock market experts have a lot of commercial properties.

For example, Vijay Kedya recently came in an interview and said that at least 8 to 10% of his income comes from real estate properties which are commercial properties. And this is basically how they build a flywheel. They use stock market income to build offline tangible assets because the stock market income might not come every single year.

Like for example, this year the stock market income has been zero. But someone like an superstar investor who has multiple cash flow generating machines, they will keep funding his portfolio right now. And because of that, he can now invest in the stock market at lower rates.

So he's winning in any economic cycle and he's not dependent on the market for a victory. Now this was a reality check because leverage isn't magic or risk-free. Definitely leverage has its own problems.

But why is it that when a common man like me takes leverage, people consider it bad? That if you have so much debt, you have so much loan, it's bad. Please pay it off early.

But the rich never want to pay off their loan fast. In fact, the rich want to grow by using loan and by building as many assets as possible because the more assets they have, the more assets they can put up for collateral and the more leverage they can build. And imagine after 10 15 years, one day all the assets will be debtree.

Now just imagine if he's built 5 to seven assets with getting around 7 to 8% yield um at that point would be unbelievable. the amount of free cash flow that he will generate at that point he can go and invest in multiple different assets in startups and that is how you start building generational wealth. Now while a middle-class investor is slowly saving up to buy one property and then works another 30 years to clear that and has to pay the EMI on this property after tax deducted salary.

The same time the other guy is using a flywheel like this saves 30% of tax and uses that 30% that is a huge advantage to build more and more assets. So now I hope you understand why the rich people don't actually do SIPs because SIPs are fundamentally designed for people who need help with discipline in saving and for people who have low capital. But please understand once you build a portion of capital let's say your SIP has gone to 4 5 crores the first thing you need to do is let that SIP grow but take that 4 crores and try investing it into other assets.

It might not always be a rental yield of 8%. It can also be some startup opportunities some business opportunities some cash flow generation while your SIPs are growing while your dividends are coming. Diversify yourself into other businesses and that is something that will help you a lot.

So I hope you guys enjoyed this video and I hope you guys like this video. I know these are some really new tricks for you guys to think and a lot of you guys might not agree with me. A lot of you guys might also think that Shashank this is uh very difficult for a middle-ass investor to do.

But I would honestly disagree with that because I believe it is also the mindset and I know so many people who have come from nothing and today they have three to four commercial properties along with a massive stock market pile today. Right? So it is not like it is not possible.

It is possible. There are 50,000 problems around this as well, but I have seen people going through all of that and actually coming out very successful. So, I hope you guys can do the same and this is some information that you guys might enjoy.

Again, before ending the video, we just want to give a big shout out to our sponsor Grow because with them, we have now been able to upgrade our entire studio and our knowledge that we can give out to you guys. So, if you want to know more about Grow and Investing, you can definitely check out the link in the description below. If you guys like this and you found something useful in this video, please click on the like button and share this with your friends as well.

Thank you guys. Take care. See you guys.

Bye-bye.