Equity mutual funds are often the smartest, laziest ways to become a ‘Crorepati’. By laziest, we mean one does not have to really slog to make a ton of money. All you need to have is a disciplined mindset to achieve your goal.
The key to exponential growth of money is s compounding. Here is how it works – let us say you invest some money (principal) that earns interest for you, at a certain rate, at the end of the first period. At the end of the second period, you earn interest from two streams -the principal and the interest you earned at the end of the first period, also earns interest. The total sum that earns interest in the third ears gets even bigger; thus, the pie gets bigger in the fourth year, the fifth, and so on.
Compounding can be your worst enemy, if you are in debt and your best friend, if you invest smartly. An unpaid Rs.1 lakh debt on a credit card balance with an annual interest rate of 27 percent can increase to Rs. 3 lakh in five years. So, stay away from using credit cards unless you really need to do so, you are only making the banks amass wealth in a compounded manner. If you want to create wealth, use the power of compounding to your advantage through equity mutual fund investments.
Invest in equity mutual funds early, if you want to benefit from the power of compounding. If you start late, you will have to increase your SIP amount to get to your Rs. 1 crore target. Let’s consider the following scenario, wherein you wish to become a crorepati at age 60 and are investing in an equity mutual fund with a rate of return of 10 percent per annum –
- If you are 20 years of age, and your goal is to accumulate Rs. 1 crore by the time you turn 60, then you have to invest just Rs. 1580 per month.
- If you are 30 years old, you have to invest Rs. 4420 per month to achieve the target of Rs.1 crore in 30 years
- If you are 40 years old, you have to invest Rs. 13,170 per month to reach the target of Rs. 1 crore in 20 years.
From the above example, one may think that 30 years is still a long period to become a Crorepati. We have given a modest example of a mutual fund which grows at 10 percent per annum, and an SIP amount which is just Rs. 4420 per month. The average equity mutual fund earns between 14 to 16 percent on a long-term.
You can become a Crorepati faster by doing any of the three things:
- Invest higher amounts in SIP
- Invest early
- Invest in a well-chosen mutual fund with a good track record of performing well even in downturn markets.
An SIP or Systematic Investment Plans helps you to harness the power of compounding with the help of fixed investment amounts at regular frequencies like weekly, monthly or quarterly. The most common way in which an SIP is done is through monthly investments.
The benefit of investing through an equity mutual fund in an SIP format is that you are buying units irrespective of how the market behaves. In other words, you do not have to time the market. So when the market is bearish or low, you end up buying more units. Let’s say you are investing Rs. 10,000 every month and due to market correction, this month, the NAV of your fund has fallen from 20 to 16. So, while you would get allotted 500 units (10000/20) in the previous month, this time you will end up getting 625 units (1000/16 =625).
On a long-term (5 years at least), when it comes to redeeming your investments, all units are more or less, worth the same. This is what we mean, when we say that SIP has a rupee-cost averaging benefit. So, during redemption, you see that you have made a substantial profit off the units that were bought at a low price, during the time when the market was low. Since you paid a lower average price, the returns are high.
Many investors erroneously exit equities when the prices begin to fall, and invest when the market goes up. This is a wrong way to approach your wealth creation goal. An SIP gets rid of an investor’s interest to time the market and follows an automated process of regular investments. In the first place, timing the market is a tough ball game for everyone, including professionals. So, follow the SIP route for a ‘lazy way’ to become a Crorepati.