If you can do an SIP for a period of 10 years, your SIP amount only needs to be Rs 50,000 per month to reach a target of Rs 1 crore. If you can only spare 5 years, this amount almost triples to Rs 1.30 lakh per month. In this article, we will give you detailed table for different tenures and rates of return for achieving your target of Rs 1 crore. We will also give you the rationale behind our calculations and the factors which could speed them up or slow them down.
Our plan to reach a target of Rs 1 crore
|How much is needed||5 years||10 years||15 years|
|Monthly SIP||Rs 1,30,000||Rs 50,000||Rs 25,000|
|One-time lumpsum||Rs 58.41 lakh||Rs 34.12 lakh||Rs 19.93 lakh|
|If you can hike by 10% pa||Rs 100,000||Rs 30,000||Rs 11,000|
Notes: Assumed rate of return is 12%. Assumed rate of tax is 10% (Long Term Capital Gains Tax). Figures have been rounded off to multiples of Rs 1,000 for convenience.
1.We have assumed a long term rate of return of 12%. Our assumption is conservative. The return given by large cap funds (the relatively safest among equity fund categories) over the past 10 years (as of 14th Jan 2019) is in fact 14.97%. The returns of midcap and small cap funds are even higher. However we cannot blindly assume that the same returns will be repated in the future. Hence we are taking the more conservative figure of 12% by relying on two more stable factors. First, the long term real GDP growth in India is around 7% and second, the long term inflation rate in India is 4-6% (average of 5%). Taking the sum of these two figures, as per the formula below, we get, 7% + 5% = 12%
|Equity Returns = Real GDP Growth Rate + Inflation Rate|
The earnings of companies and hence their stock prices track both these components over the long term. They grow at a rate that adds inflation and real GDP growth. Hence this is also roughly the return that an equity mutual fund will give over a long period of time.
- We have assume a tax rate of 10%. This is the current long term capital gains tax (LTCG) on mutual funds if they are held for more than 1 year. An amount of Rs 1 lakh is exempted from LTCG but we are ignoring this relatively small amount for convenience.
What can reach your target faster
- Alpha: In our calculations, we have completely ignored ‘alpha’ or the fund manager’s ability to beat the market. If you pick a good fund, you can in fact get a higher return than 12%.
- Mid and Small Cap Funds: Mid and small cap funds carry a higher level of risk and can hence generate returns greater than the 12% we have assumed. Historically, mid cap funds have given 21.61% and small cap funds have given 20.27% over the past 10 years. Even if future returns slow down by as much as 5% per year, your assumed return will be 15%, higher than the 12% taken here.
What can slow you down
1. GDP Growth collapses: Political turmoil, war, long recessions etc can cause the GDP growth rate to go below 7% and remain there for a sustained period of time. In such a case, you may not be able to achieve your goal by investing the amounts mentioned above.
2. Tax Rates Rise: Future governments may increase the tax on equity mutual funds above 10%. For instance equity mutual fund gains were exempt before 2018. Finance Minister Arun Jaitley’s budget made them taxable at 10%, much to the surprise of the markets.
3. Funds give negative alpha: The fund you have chosen may actual underperform the market year after year and fail to even meet the conservative target of 12%. This is why fund selection is extremely important. You can refer to our analysis here, for your fund selection.
Which fund should you invest in
Fund selection is a skill and should be driven by careful research. You can find our list of recommended funds here. You should also periodically review your portfolio and rebalance your funds to remove underperformers.
Caution: Rs 1 crore will mean less in the future
Remember that because of inflation, the value of money falls over time. Rs 1 crore is a big amount at present but it will mean less and less in the future. Hence you should try and invest as much as possible in order to achieve this target as early as possible.