The power of compound interest is not limited to textbooks, in real life it is a sure shot pathway to becoming a crorepati. All you need is to understand aspects of investment.
The more you invest and allow it to blend for longer, the larger your corpus will be.
Being a multi-millionaire or crorepati as they call it in India, is the dream of most investors and savers. But the process of becoming crorepati is not easy, well unless you can get a lottery or can win Kaun Banega Crorepati with Amitabh Bachchan. But why should you be limiting your chances to the faith of luck? It isn’t difficult, all you need is the power of compounding and with a diversified portfolio of investments to compound your money for a long time.
How does Compounding works?
Compound interest is usually called the eighth wonder of the world. Although you cannot control the rate of return, you can decide how much you can invest and for how long. The more you invest and let it stay longer, the larger your corpus will be. A look at the table gives an idea of how much you should be investing, to accumulate Rs 1 crore, every month.
As you extend the deadline, the work will become easier. For example, if you expect a return of 12 percent in the next 10 years, you will have to reach your target of Rs 1 crore by investing Rs 43041 per month. Here your total investment is Rs. 51.65 lakhs. However, if you decide to get it over 20 years, then you only have to invest Rs 10,009 per month.
In 20 years, you invest Rs 24.02 lakh. As you extend the tenure, you need to invest in small amounts, as compounding advances your investment. However, the rate of return in the real world keeps on fluctuating. And so, investors have to realign their actions.
Start with an Investment Plan
To dream of becoming a crorepati is one thing and achieving that mark is another. Certified financial planner Parul Maheshwari says, “Set the timeframe in which you want to reach Rs 1 crore mark and start asset allocation accordingly.” She also adds “If you have less time on hand, then you have to invest in bond funds and other fixed-income options. However, if you have a longer tenure, you can start with a higher allocation to shares through equity mutual funds”.
How to Invest right and prosper
You need to start early and invest in assets (equity, debt, and gold) to beat inflation and be on the positive end of getting returns. Vishal Dhawan, Founder, and Chief Financial Planner, Plan Ahead Wealth Advisors, said, “Many times investors wait for salaries, bonus payouts or favourable market conditions to start their investments.” With whatever resources you have, it is better to start investing as soon as possible and as your income increases, gradually increase your investment.
Many times, investors bet on one share to become a crorepati. Such dreams rarely come true. Dhawan said that instead, investors are better off building a better-diversified portfolio of investments across asset classes and investment products.
If you are investing for a long period, avoid checking your portfolio every day, especially if you are investing in a volatile asset class like equity. Avoid changing your portfolio again and again simply because the market has become volatile. Investors take extreme steps such as stopping their systematic investment plan (SIP) in equity funds when the stock market is volatile. Such steps should be avoided as far as possible. The asset allocation driven investment approach comes in handy at such times. In such a time, the asset allocation driven investment approach is simple. Timely rebalancing of assets from time to time helps you avoid any emotional tasks.
As far as possible, stick to investment products that do not come with lock-in. Maheshwari says, “As you get closer to your goal, move away from riskier asset classes to lower-risk bonds.” It helps protect your corpus from the vagaries of the stock markets.
Inflation and taxation
Both are unavoidable evils for most investors. Inflation eats into your purchasing power. Although Rs 1 crore seems sufficient today, if you are looking at the purchasing power of that amount, then you should also factor in inflation. Simply put, at 4 percent inflation, 20 years from today, you need Rs 2.19 crore to match the purchasing power of Rs 1 crore. And, in that case, at the rate of 12 percent of the expected return, you should invest Rs 21930 per month for the next 20 years, which will reach Rs 2.19 crore.
Taxes also account for your investment returns. Capital gains beyond a limit are taxed. Therefore, while setting your goal, you have to keep this aspect in mind.
Accumulation 1 crore with Mutual Funds
Another way you can go towards your journey of becoming a crorepati is Mutual Funds. Simply follow the principle of 15*15*15, that is for 15 years, invest 15,000 rupees per month in a mutual fund that is giving 15% of the return. You’ll end up investing only 27 lacs and in turns will get a whopping 73 lakhs return.
Gaining that tag, of a crorepati is not difficult. All one need is figuring out the right investment plan and understanding the power of compounding.