Most parents complain about how expensive everything is nowadays and how much cheaper basic necessities were back in the day. Inflation has indeed pushed up the cost of everything ranging from fuel to food. With expenses having risen by leaps and bounds in the past couple of decades, it is only natural that individual savings goals have to be adjusted accordingly.
A couple of decades earlier, becoming a lakhpati (net worth of Rs. 1 lakhs) was a very big deal, but with an average flat in a decent locality being valued at Rs. 50 lakhs or more in India’s larger cities, having Rs 1 lakhs as a long-term savings target is no longer a viable option. So the more appropriate goal in terms of a retirement corpus is Rs. 1 crore. The good news is – it is in fact an achievable goal and only a bit of financial discipline is required to achieve it.
Investment Time Horizon
The first step before coming up with an investment strategy is to fix a time horizon, the longer your time horizon, the easier it will be for you to reach your goal. In case you are planning from the point of view of building a retirement corpus, 15 years is probably a good place to start.
The next question is how much can you actually save in a month without completely upsetting your monthly budget. This is of course dependant on your salary and life stage. Additionally, due to unavoidable circumstances, your annual savings might vary from year to year. Let’s assume that on an average you can save Rs. 15,000 every month. So by the end of 15 years i.e. 180 months, you would have saved Rs. 27 lakhs assuming that you had no savings to begin with.
Investing to Grow your Savings
The last and perhaps the most important question is – where to invest? Traditional investment options like PPF, tax saver fixed-deposits, KVP and NPS have relatively low interest rates of 8% or lower so your money will grow slowly and a lot of your gains will be gobbled up by the higher rate of inflation growth. Though ideal for the completely risk averse, these low rates would definitely not be suitable for reaching your Rs. 1 Crore savings goal.
Hence you will have to opt for the comparatively aggressive option of investing in mutual funds, which offer a much greater chance of capital appreciation. Debt mutual funds on average offer ROI of about 10% per annum (approx.) while equity mutual funds offer higher returns of 15% (approx.) on an average.
The following are the results of SIP investments of Rs. 15,000 per month made in debt mutual funds and equity mutual funds.
Table1. Investment Value of Rs. 15,000 SIP over a 15 year tenure in case of Debt and Equity Mutual Funds*
(Rs.15,000 per month)
(Debt Funds @10% p.a.)
(Equity Funds @15p.a.)
|1||Rs. 1.8 lakhs||Rs.1.9 lakhs||Rs. 1.95 lakhs|
|5||Rs. 9 lakhs||Rs. 11.7 lakhs||Rs. 13.5 lakhs|
|8||Rs. 14.4 lakhs||Rs. 22.1 lakhs||Rs. 27.9 lakhs|
|10||Rs. 18 lakhs||Rs. 31 lakhs||Rs. 41.8 lakhs|
|12||Rs. 21.6 lakhs||Rs. 41.8 lakhs||Rs. 60.5 lakhs|
|15||Rs. 27 lakhs||Rs. 62.7 lakhs||Rs. 1.01 Crores|
|18||Rs. 32.4 lakhs||Rs. 90.8 lakhs||Rs. 1.7 Crores|
|19||Rs. 34.2 lakhs||Rs.1 Crores||Rs. 1.9 Crores|
|20||Rs. 36 lakhs||Rs. 1.1 Crores||Rs. 2.3 Crores|
*The facts and figures mentioned above are for illustrative purposes and are subject to periodic change. Debt funds are subject to indexation (inflation adjustment) benefits, which have not been quantified here.
As you can see in the above example, depending upon whether you are investing in debt mutual funds or in equity mutual funds, amassing a net worth of Rs. 1 crore is definitely in the realm of possibility. However, if you had made similar investments in a PPF account, your net worth at the end of the PPF account’s 15 years maturity period would have been just Rs. 52.3 lakhs and it would have taken you 22 years to reach the Rs. 1 crore savings goal!