A lot of people must have told you what my parents had drilled down in me during my student days.
It is that you must find a promising career that pays you a decent living so that you can live happily ever after.
But they may not have told you that in the long run, it’s not just how much money you make that will determine your future prosperity.
It’s how much of that money you put to work by saving and investing it.
You see, the best time to start investing is when you are young.
The more time you have to let your investments grow, the bigger the fortune you’ll end up with.
Let us understand this using some calculations.
Let us assume you are just starting out with your investments, and need to collect Rs 1 crore in wealth when you retire at 50 years of age (yes, you’ve promised your wife that you will retire at 50!)
Also, you have the ability to invest only Rs 5,000 per month.
If you are 25 years of age now, you have 25 more years to earn, save, and invest Rs 5,000 per month.
My calculations show that to meet the target of Rs 1 crore when you reach 50 years of age, the annual rate of return at which your investments must grow at, is 12.3%.
This is very much achievable, given that Indian stock markets have generated average returns of around 18% per year over the past 30 years. So expecting just 12.3% average returns over the next 25 years isn’t unbelievable.
Anyways, things look a bit different if you are already 30 years of age, and have just 20 years to earn, save, and invest Rs 5,000 per month.
To reach Rs 1 crore when you are 50, your investments must grow at almost 17% per annum. Even this sounds achievable.
But what happens if you are now 35 years of age, and thus have 15 years to retirement?
Your Rs 5,000 monthly investment must now grow at 25% per annum for you to reach Rs 1 crore in 15 years. Seems very difficult!
And what happens if you are now 40, and have just 10 years to invest and collect Rs 1 crore?
Forget it, because your annual rate of return must now be 43%. Not achievable…unless you have some magic crystal ball that tells you which stock is going to be the next Infosys!
The equation gets even worse if you have just 5 years remaining to reach 50. Your money now needs to grow at 106.5% annually!
Stay out of the stock markets and try your hands somewhere else. Like the casino or betting on horse races?
See, you can argue that this doesn’t work as anyone can increase the amount of monthly investment from Rs 5,000 to Rs 10,000 in the future, and thus the expected rate of future return would fall.
Yes, this is very much possible, but the main idea behind my calculations is not to say that you can’t make Rs 1 crore investing for just 10 years.
What I want to put across is that with limited financial resources, which most families in India have, and ever-increasing aspirations, the goal becomes tougher the later we start investing.
Seriously, you see everywhere that people are living much longer than they used to, which means they’ll be paying bills for a lot longer than they used to.
In order to cover their living expenses after retirement and for meeting their other financial goals, they’ll need extra money. And the surest way to get it is by investing, and starting as soon as possible.
Should I start investing now?
“The stock markets are too volatile. Is this the right time to invest?” you may ask.
See, it doesn’t pay to look for the ‘best time to invest’ unless you have this divine knowledge that you are going to be very lucky with your investments.
The best course of action for most of us is to create an appropriate investment plan and take action on that plan as soon as possible.
It’s nearly impossible to accurately identify market bottoms on a regular basis. So, realistically, the best action that a long-term investor can take is to invest in a systematic, disciplined way, regardless of the level of the stock market.
Of course, the stocks or mutual funds you buy must be of good quality, and which aren’t going to destroy your capital.
But do it now. Now, as in, NOW!
Vishal,
Can one is really systematic in the stock market? I am 30 and dont want to get into mutual fund ( they take my money and put in some stocks for a fees) with no garuntee that it would work.
if the answer is yes then how and if no then what are the steps to be followed to make sure that i am investing appropriately on a regular interval.
Hi Vikrant,
Among a majority of dud funds, there still are some good mutual funds out there where you can invest systematically (through SIPs) for the long term. I’m not talking about the funds based on their performance only, but also based on their processes and fund management quality.
Investing at regular intervals – either on your own or through a good MF – is the key here. That is where the power of compounding really works.
Regards,
Vishal
Vishal,
sorry but I meant direct stocks, how can one be systematic in that, i am fully aware about SIP and understand the benefits of it ( good fund).
Vikrant,
I believe the systematic way to invest in stocks is to practice discipline in finding the right stocks and then having the courage to invest in them. Of course, once you find a good stock, you can start with investing a small amount in it each month till the time you are comfortable with its price.
Regards,
Vishal
Dear Vishal,
You are right – “It’s nearly impossible to accurately identify market bottoms on a regular basis. So, realistically, the best action that a long-term investor can take is to invest in a systematic, disciplined way, regardless of the level of the stock market”.
If you are investing for long term goal, disciplined way of Systematic Investment works. One can only realize the potential of it in the long term (I have experienced it myself by SIPing it since 2006 till now).
Unfortunately, most of the no voice retail investors are interested and focussed on short term results. Its the investments that made during very pessimistic times of the market (like 2008 Sept to March 2009) produce fanastic results in the long term. But, during the pessimistic times retail investors leave the market and rush in back in peak bulls (like Nov 2007 to Jan 2008). SIPing habit makes you investing in both the bull and bear market and it certainly works in the long term. If you are not investing through SIP, it is most likely that you will not invest during the pessimistic times and are likely to end up investing more during the bull phases of the market (you may go back and do a check of your investment times to understand this).
I recommend that any investor who want to invest in stockmarket should begin with SIP investment in quality MF and get familiarized with ups and down of the market before directly making stock investment.
Regards
Yes Ajay, that’s exactly what I also suggest new investors to do. But the irony is that when your blood is young, you want to try out playing riskier games in the name of “confidence”. This confidence swiftly turns into overconfidence, investors lose, and then vow to never come back to the stock market…thus laying the ground for a tough financial future.
HI Vishal and ajay, I recently read that SEBI might allow the MF industry to charge upto 3.5% fees, if thats going to happen i think it would make no sense for people like us to invest in equities, 3.5 % is too much of fees for fund management, the other aspect of this would be that the MF company would have more money to spend on Adds and eventually even the bad ones would attached a lot of investor due to these adds and eventually people who dont read much or do eanough research would be in deep trouble. Whats are your thoughts on this?
Dear Vikrant,
The subject fee matter is only under discussion. Although SEBI’s already permitted limit is 2.5%, there are many funds out there who do not exceed a 2% limit(at least as they grow). In fact, Quantum MF voluntarily capped their fees at 1.5% for their fund (even though their AUM’s are relatively much lower compared to other fund houses). So it essentially becomes another criteria for the investor to look into while identifying the fund he/she should opt for. The lower the fees better will be the returns in long term.
Even if the fee increase is permitted by SEBI, it should not deter the retail investor in investing in mutual fund. It is only the matter of choosing the fund with lower expense.
SEBI’s go ahead for increase in fees may give an upper hand to ULIP advisors, because this news will be flahsed up in the media and the ULIP brokers will use this as a selling tool to trap the investors in ULIPs, which is for sure a wealth destructive investment.
Regards
Ajay
Hi it took me 5 years to save up 1 crore and am 42 years old. It has been a difficult journey as I saved almost everything I earned. The question is how much more do I need to save before I can retire?
Dear Lokesh,
Good you have reached a point not the end. You got to know the target (Goals, financial value and the time you need it) and invest accordingly.
1Crore by itself doesnt mean anything, unless you know what for you are saving it!
Regards
Ajay
I have lost lots of my hard money in stock market (direct stock investment, Mutual funds, Pension plans with unit linked) and now I don’t trust share market. Again I earned, invested in real estate and now I am at very good position. You may get less money in fixed deposits and real estate but you can have peace of mind. Its always win-win.
AP all the best then if you really comfortable with FDs and Real Estate.. but surely I have different point of view.. Well I am not advocate of Equity Market… but one thing is sure from Data that … nothing could come close to Equity Return when you need to create real wealth by being … passive.. look you can earn higher amt by working hard.. putting more effort but that not investment.. Investment is in simply word some thing you do for while and then its auto grow out passing inflation … and tax exp.. that’s real Investments…
India Is not poor country , But here’s rich man is bad . India is a very nice and king Country. I want to make India