Topic 4: Know the power of compounding via SIP route: Is it magic or logic?
You must have heard the saying: Don't work for money, let it work for you. What it means is that once you have a good amount of money, you no longer need to work towards earning money because your returns on investments will take care of your financial needs.
Imagine you have invested Rs 1 crore in Fixed Deposits giving a 5% post-tax return. Even this meagre return will result in approximately Rs 41,000 monthly income in your hands. The same amount invested in a better asset class can result in a higher monthly income. The whole idea is that the moment you have a saving of Rs 1 crore, you can rest assured of getting a certain amount of money in your hand regularly through investment returns without physically working for it.
Today, many people want to retire young and they may not necessarily want to work till 60 years of age. If you are one of those, then it becomes very important to plan your finances smartly. You need to create a good amount of wealth to meet your financial obligations and achieve financial freedom. The best way is to first set a goal of creating your first Rs 1 crore as fast as possible and then let it grow on its own.
Creating your first crore sounds good and is very much achievable, provided you start early because it will not happen instantly. You need to be patient and give your investments a good amount of time to grow. Apart from that, you need to be disciplined in terms of managing your expenses as well, while keeping in mind ever-rising inflation and the number of years you would need money to fund your expenses post-retirement.
Understand the power of compounding
Achieving the target of Rs 1 crore depends on the amount of money you need to save and the financial products you invest in. The amount of money you need to invest will also change based on the financial products you choose and on your asset allocation. If you invest in products like FDs, Public Provident Fund or a similar fixed return bearing financial product, the return is unlikely to exceed 8% per annum. In order to achieve your target of Rs 1 crore by 2030, you will need to invest Rs 42,000 per month for 12 years.
Investing in real estate via monthly mode is not possible and investing in gold may not make sense due to its uncertain prospects. The best option that you have is equity investment via the mutual fund route. If you start a mutual fund Systematic Investment Plan (SIP) assuming a return of 15% per annum, the amount you need to invest will be Rs 25,000 per month, as against Rs 42,000 in a fixed instrument. If you can increase your annual SIP amount by stepping it up by 10% every year than the amount you need to invest per month comes down to Rs 16,500, from Rs 25,000. If you look at the history of stock market returns, Sensex has in fact given more than 16% returns over the last 39 years since its inception in 1979 till 2019. As explained earlier, the key is always long term investing.
The longer you invest via SIPs, the higher will be the returns you get. A monthly SIP of Rs 10,000 with an assumed return of 15% invested for 10, 20, and 30 years will result in a corpus of Rs 27.86 lakh, Rs 1.51 crore, and Rs 7 crore respectively. If you look at the pattern, you will find that doubling the period of investment increases your returns 5 times. Similarly, tripling the period of investment increases your returns 24 times. There is no magic, just logic, which is the power of compounding.
SIP your way to retirement with the help of the power of compounding
Now that you have seen the power of early investing by using the power of compounding, use that to plan for your retirement as well. The best time to start planning your retirement is right when you start working, which is when you are in your 20s. But when you are in your 20s, retirement seems to be very far away. On the flip side, it is also when you have fewer obligations. By saving even a little you would be able to create great wealth. In your 30s, you have to account for expenses towards family such as monthly household budgets, children's' school fees or EMIs for your home or car loan.
The more you delay your investments, the lesser would be the time you have to leverage the power of compounding. Start saving at least 10% when you are in your 20s to have a comfortable retirement when you are in your 60s. If you wait till you turn 30, then you need to save 15% to 20 % of your total income, which will keep on increasing with further delay.
Imagine you have invested Rs 1 crore in Fixed Deposits giving a 5% post-tax return. Even this meagre return will result in approximately Rs 41,000 monthly income in your hands. The same amount invested in a better asset class can result in a higher monthly income. The whole idea is that the moment you have a saving of Rs 1 crore, you can rest assured of getting a certain amount of money in your hand regularly through investment returns without physically working for it.
Today, many people want to retire young and they may not necessarily want to work till 60 years of age. If you are one of those, then it becomes very important to plan your finances smartly. You need to create a good amount of wealth to meet your financial obligations and achieve financial freedom. The best way is to first set a goal of creating your first Rs 1 crore as fast as possible and then let it grow on its own.
Creating your first crore sounds good and is very much achievable, provided you start early because it will not happen instantly. You need to be patient and give your investments a good amount of time to grow. Apart from that, you need to be disciplined in terms of managing your expenses as well, while keeping in mind ever-rising inflation and the number of years you would need money to fund your expenses post-retirement.
Understand the power of compounding
Achieving the target of Rs 1 crore depends on the amount of money you need to save and the financial products you invest in. The amount of money you need to invest will also change based on the financial products you choose and on your asset allocation. If you invest in products like FDs, Public Provident Fund or a similar fixed return bearing financial product, the return is unlikely to exceed 8% per annum. In order to achieve your target of Rs 1 crore by 2030, you will need to invest Rs 42,000 per month for 12 years.
Investing in real estate via monthly mode is not possible and investing in gold may not make sense due to its uncertain prospects. The best option that you have is equity investment via the mutual fund route. If you start a mutual fund Systematic Investment Plan (SIP) assuming a return of 15% per annum, the amount you need to invest will be Rs 25,000 per month, as against Rs 42,000 in a fixed instrument. If you can increase your annual SIP amount by stepping it up by 10% every year than the amount you need to invest per month comes down to Rs 16,500, from Rs 25,000. If you look at the history of stock market returns, Sensex has in fact given more than 16% returns over the last 39 years since its inception in 1979 till 2019. As explained earlier, the key is always long term investing.
The longer you invest via SIPs, the higher will be the returns you get. A monthly SIP of Rs 10,000 with an assumed return of 15% invested for 10, 20, and 30 years will result in a corpus of Rs 27.86 lakh, Rs 1.51 crore, and Rs 7 crore respectively. If you look at the pattern, you will find that doubling the period of investment increases your returns 5 times. Similarly, tripling the period of investment increases your returns 24 times. There is no magic, just logic, which is the power of compounding.
SIP your way to retirement with the help of the power of compounding
Now that you have seen the power of early investing by using the power of compounding, use that to plan for your retirement as well. The best time to start planning your retirement is right when you start working, which is when you are in your 20s. But when you are in your 20s, retirement seems to be very far away. On the flip side, it is also when you have fewer obligations. By saving even a little you would be able to create great wealth. In your 30s, you have to account for expenses towards family such as monthly household budgets, children's' school fees or EMIs for your home or car loan.
The more you delay your investments, the lesser would be the time you have to leverage the power of compounding. Start saving at least 10% when you are in your 20s to have a comfortable retirement when you are in your 60s. If you wait till you turn 30, then you need to save 15% to 20 % of your total income, which will keep on increasing with further delay.