Who wouldn’t want a crore of rupees stashed away in their bank account? The good news is that becoming a crorepati is not only feasible for the majority of people, but also that the process is straightforward and easy. So what is the key to becoming a crorepati, even if you have just begun working, are in your mid-30s, or are ready to retire? The big discovery is to start investing early and allow the magic of compounding work its magic on your money.
Starting early implies getting started with any level of investment, no matter how big or small, and avoiding procrastination. Even tiny amounts of savings will help you get started and the habit of savings will soon catch up. Here’s an example of how early investing helps. Assuming A starts making monthly investments of Rs 2,500 at the age of 25. And think about B, who starts saving after ten years. At age 35, B starts investing Rs 5,000 each month.
Assuming a return of 12 per cent, A’s bank account will be worth Rs 22.78 lakh when both A and B reach the age of 45, whereas B’s will be worth only Rs 11.09 lakh, despite B investing more than A. You can avoid being in the same situation as B by starting to invest early. In doing so, you also need to set aside a lower amount than otherwise.
Now, comes the second part of the investing equation. You need to let those savings remain invested and let it remain exposed to the growth assets. By remaining invested, you are benefiting from ‘Compounding’.
Power of compounding
Compounding is described mathematically as ‘the rise in the value of an investment due to the interest generated on the principal, as well as the cumulative interest.’ According to renowned American businessman and financial analyst Jim Rogers, compounding is the secret to successful inve
sting and is one of an investor’s most effective tools to multiply wealth over time. The simplicity with which this idea can be understood is what gives it its beauty. But it can have a significant influence when put into practice.
Here’s an illustration to show how compounding works.
Let’s assume A and B each put down Rs. 50,000 in a 10-year investment opportunity that promises a 10% yearly interest rate. A chooses to pick an investment that gives simple interest while B picks an investment that provides compound interest. A will have a total corpus of Rs. 1 lakh after ten years. B, on the other h
and, would make Rs. 1.30 lakh in the corpus.
This is due to the fact that in A’s case, the interest was only computed on the Rs. 50,000 initial principal amount. However, in B’s situation, the principal and interest from each year were combined to determine the interest for the following year. This significantly increased B’s income.
Power of compounding in mutual funds
Compounding works best in fixed-return investments. Still, even though there is no assured return in mutual funds, the power of compounding can be seen in them. Systematic investment plans (SIP )in equity funds are the right way to benefit from compounding. This is becuase equities are volatile in nature but tend to drift upwards over a longer duration.
When allowed to grow over a longer duration, returns from equity funds, especially through SIPs, are perceived to be better. This is because you keep acquiring mutual fund units through SIPs, and future returns are based on the future NAV and the quantity of units you own. Equity funds have the effect of compounding over subsequent years because the returns are not linear.
The power of compounding can be used to help you plan for future objectives like child education goals or your own retirement. A systematic investment plan in equity funds provides the road to keep saving regularly and over time create a sizeable corpus.
15-15-15 mutual fund Crorepati strategy
Here’s a simple strategy to follow if you want to accumulate Rs 1 crore through mutual fund investment and become a crorepati over time. The 15-15-15 mutual fund strategy can help you become a crorepati or even a multi-crorepati!
The 15-15-15 mutual fund investment strategy tells you how much you should set aside each month, for how long, and at what growth rate, in order to reach your goal of Rs 1 crore. It goes like this – Rs 15000 for 15 years at 15% – is what it takes to reach the goal of Rs 1 crore!
In other words, the goal of Rs. 1 crore might be reached by investing Rs. 15000 every month for 15 years at an expected annualized growth rate of 15%. In the equities market, it might not be possible to provide a return of over 15% each year, but over the long run, an annualized return of about 15% could be possible.
Start saving today if you haven’t already for your long-term objectives. The longer you wait, the more money will need to be invested. By beginning early, you can save less money overall and benefit from the long-term compounding effect.
If you are looking to accumulate Rs 1 crore for any of your future goals or become a crorepati to retire early, do get in touch with us by clicking here.