Does the thought of having INR 1.5crore in your bank account excite you? I’m sure it does, why wouldn’t it? The obvious question is how do we get this money?
Well, the good news is, it is quite easy to achieve this. However, like all the good things in life, this too does not happen overnight. You need to give it time, a lot of time.
Let me explain.
Historically, on an average, the stock markets have generated a return close to 12 per cent – 13 per cent year on year. Going forward, I would not be surprised to see the average return improve to 15 per cent, especially considering the way ‘India Inc’ is positioned at this point.
What do I mean by ‘average return’ here? Assume the market returns for three consecutive years are 16 per cent, 4 per cent, and 26 per cent respectively. If you do the math, the average year on year return in this case is about 15 per cent.
Anyway, so how do you benefit from this 15 per cent average year on year return and make INR 1.5 crore? Quite simple – invest small amount of money, every month in a disciplined way. They call this the systematic investment plan (SIP).
I thought I’ll put some numbers and see how money would grow if one were to invest a small fixed amount of money, every month, for the next 300 months, and let it grow at 15 per cent.
For the sake of simplicity, I’m assuming one can invest just about INR 5,000 every month in a well diversified equity mutual fund.
Let us assume you can consistently invest this money in a mutual fund every month for the next 300 months. What do you think will happen to your investments?
The first investment of INR 5,000 will be invested for 300 full months at the rate of 15 per cent. So at the end of 300 months, the value of this investment will be INR 164,595. This is called the terminal value of your investment. The 2nd month’s investment of INR 5,000 will be invested for 299 months and its terminal value will be INR162,689. At the end of 298 months, the 3rd month’s investment will grow to INR 160,805. So on and so forth.
If you add up all the terminal values of all the investment over 300 months, you will end up with a whopping sum of INR 1,37,82,804 or about 1.37 crore in short!.
Can you imagine this? A meager sum of INR 5,000 per month can lead you to such massive wealth. Mind you – a casual visit to your neighborhood bar for a fun evening with your friends will set you back by 5,000 or probably more. So in that sense, an investment of the same per month (for your future) is really not much.
But hang on a second — we were talking about INR 1.5 crore right? How will we get this amount? Well, quite simple, instead of Rs.5,000 if you stretch a little bit and decide to invest INR 5,500/- (an extra 500 per month) then at the end of 300 months you will end up with INR 1,51,61,084/- or INR1.51 crore in short. Interesting right? A decision to invest an additional INR 500 per month can lead to an addition amount of INR 13,78,280.
I think most of us can afford to invest INR 5,000 per month. If not INR 5,000, I would suggest you start with any amount comfortable, but do work towards increasing this amount over time. I’m certain the savings that you do today will help you and your family a great deal, 300 months later.
You can thank me then!