Everybody wants a reward while nobody would like the risk on 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.
Why to start an SIP?
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 16 per cent over the period of 39 years. Compared to it, gold has delivered an annualised return of just 6 per cent. While a bank fixed deposit is currently giving around 6-7 per cent for a 5 year fixed deposit.
Apart from this the biggest advantage with equity is taxation. Gains upto 2 year are taxed at 15% & after 1 year is taxed at 10%, the lowest among any other asset class. 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%) will effectively get less than 5% in a FD.
In case of gold, gains before 3 years are added to the income of the individual just like FDs while gains after 3 years are taxed at the rate of 20% 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 Rs.322 per month to accumulate this amount. We have assumed a rate of return of 15% 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 42 years of age, given 15% rate of interest. If you continue investing Rs 5,000 per month till you retire, you will be able to accumulate Rs 15.50 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 1444 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 invest 6679 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.