Everybody wants a reward but not risks that come while working towards it. This is also the main reason for the popularity of systematic investment plans, or SIPs, which give investors the option of gaining from market while reducing the risk of volatility that is inherent in all financial markets.
Everybody wants a reward but not risks that come while working towards it.
Why to start an SIP?
Because equities are growth assets and have the potential of delivering far superior returns than any other asset class if one remains invested for long-term.
Sensex has delivered an annualised return of 12 per cent over the period of 20 years. Compared to it gold has delivered an annualised return of just 6 per cent. While a bank fixed deposit is currently giving around 7-8 per cent for a 10 year fixed deposit.
Apart from this the biggest advantage with equity is taxation. Gains after one year from equity are completely tax free while in case of debt investments like fixed deposits, the interest is added to the income of the investor and taxed as per the slab. So, a person falling in highest tax bracket (30 per cent) will effectively get only around five percent interest in a FD.
In case of gold, gains before three years are added to the income of the individual just like FDs while gains after three years are taxed at the rate of 20 per cent post indexation (helps to reduce the tax burden by adjusting the gains against price rise).
How to become a crorepati?
The key to reaching this goal is to start early provided equities deliver the expected rate of return. So, start your SIP today.
The early you start the more you benefit. If you are 20 years old and you want to accumulate Rs 1 crore by the time you become 60, you just have to invest just Rs 1,581 per month to accumulate this amount. We have assumed a rate of return of 10 per cent per annum.
Yes, the number may look surprising but this is the power of compounding where if you stay invested you earn returns over your gains which help you accumulate faster.
If you can increase the amount to Rs 5,000, you can become a crorepati by the time you reach 49 years of age, given 10 per rate of interest.
If you continue investing Rs 5,000 per month till you retire, you will be able to accumulate Rs 3.16 crore when you reach 60 years of age. Therefore, your accumulation will also depend on the time you stay invested.
However, if you have lesser time in your hand, you will have to contribute more towards the goal.
If you start at the age of 30, you will have to increase your investments to Rs 4,423 per month to accumulate Rs 1 crore by the time you retire, given all other conditions remain same.
If you start investing at 40 years of age, you will only have 20 years in your hand, therefore you will have to 13,169 per month to accumulate Rs 1 crore.
So start today and continue investing in a disciplined manner.
Fund houses offer a wide variety of mutual funds, take the help of your advisor to help you choose the right fund that matches your risk and return profile.
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