- Date : 22/06/2022
- Read: 5 mins
Many people don’t get started with their big financial goals as they feel the goals are out of reach. This article discusses the investment process step-by-step.
An investor should follow appropriate asset allocation with investments in equity mutual funds (MFs), fixed income, gold, etc. Each asset class has a specific role to play in your investment portfolio. However, to create substantial wealth in the long run, your focus should be on the equity portion. Over time, SIP in equity mutual funds can multiply your investments manifold, thanks to the power of compounding.
In this article, we will understand how you can make Rs 100 crore by investing Rs 25,000 per month in a systematic investment plan (SIP).
Earn Rs 100 crore by investing Rs 25,000 per month
You must be wondering how anyone can accumulate a considerable amount like Rs 100 crore by investing just Rs 25,000 per month in equity mutual funds through an SIP. Is it even possible? Yes, it is!
Image: The power of compounding
As seen in the above image, if you invest Rs 25,000 per month for the next 40 years, you will accumulate Rs 107.98 crore if the return on investment (ROI) is 16% CAGR. Are you wondering whether a return of 16% CAGR is possible? Historically, Indian equity markets have given that kind of return (or even higher) during long periods of investment.
During these 40 years, the investor has invested only Rs 1.2 crore (Rs 25,000 per month x 12 months x 40 years) from their pocket. The final accumulated amount of Rs 107.98 crore is almost 100 times the invested amount. That is the power of compounding in the long run!
Top funds that have given the best returns
Some of the equity mutual funds that have given the best returns in the last 10 years include:
Also Read: Give Yourself The Magic Of Compounding
Factors to keep in mind on your financial planning journey
By now, you must be convinced that you can accumulate Rs 100 crore by investing just Rs 25,000 per month. However, there are some factors you must keep in mind while embarking on your financial planning journey.
1) The power of compounding works only over a long period of time
If you observe the above image, you will see that the orange line, which represents the growth in your investments, has hardly moved in the first 20 years. But, in the next ten years, it starts moving up rapidly. Finally, it has shot up like a rocket in the last ten years.
The personal finance lesson here is that compounding works in the long run. The above chart also shows the real power of compounding in the last ten years only.
2) Stock market returns are never linear
The chart shows how your accumulated amount increases year after year. The chart is only for illustration purposes. In real life, stock market returns are never linear. In fact, stock markets are volatile in the short run. Every year, there are drawdowns from the previous highs. The only difference is that in some years, the drawdowns are deep, while in others, the drawdowns are shallow.
Chart: Nifty 50 yearly drawdowns from previous highs
As seen in the above chart, there has been an annual drawdown of more than 10% from the previous all-time highs from 2014 to 2022. On two occasions (2016 and 2020), there has been a drawdown of more than 25%.
The lesson here is that stock market returns are never linear. However, in the long run, stock markets always overcome earlier price corrections and go on to make new all-time highs.
3) Investment consistency is important
For the power of compounding to work, you must continue with your investment strategies over the long run. If you stop your investments midway and redeem them, here is what your corpus will look like.
Note: The above table assumes a return of 16% CAGR
As can be seen in the above table:
- If you stop your investments just ten years earlier (invest for 30 years instead of 40 years), the corpus accumulated will be less by more than 80% (just Rs 21.88 crore instead of Rs 107.98 crore).
- If you stop your investments halfway (invest for 20 years instead of 40 years), the corpus accumulated will be only 4% (Rs 4.31 crore) instead of the intended Rs 100 crore target.
- If you stop your investments in 10 years instead of 40 years, you will accumulate less than 1% (only Rs 73.14 lakh) instead of the intended Rs 100 crore target.
We have seen how an individual can accumulate Rs 100 crore in 40 years. Investing for the long term is important as the power of compounding works only over time. During this long-term journey, keep in mind that there will be several drawdowns since investment returns are never linear. Overlook short-term volatility and drawdowns, be consistent with your investments, and you will definitely reach your financial goal.