If you can do 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. This article talks about the detailed plans for different tenures and rates of return in order to achieve your target of getting Rs. 1 crore.
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 lump-sum||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|
Note: The rate of return and rate of tax (Long Term Capital Gains Tax) is assumed to be12% and 10% respectively. Figures have been rounded off to multiples of Rs. 1,000 for convenience.
1. We have assumed a long term rate of return at 12%. 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 10.59%. The returns of mid-cap and small-cap funds are even higher.
However, we cannot blindly assume that the same returns will be repeated in the future. Hence, we are taking a 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 an equity return of 12% (7% + 5%).
|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.
2. We have assumed 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 Help You 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%, as per our assumptions. Historically, mid-cap funds have given a return of 21.61% and small-cap funds have given the return of 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%, which is higher than the return of 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 the same 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. Much to the surprise of the market, Finance Minister Arun Jaitley’s budget made them taxable at 10%.
3. Funds give negative alpha: The fund you have chosen may actually 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 the list of recommended funds at Paisabazaar. You should also periodically review your portfolio and rebalance your funds to remove underperformers.
Consider: 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 lesser in the future. Hence, you should try and invest as much as possible in order to achieve this target as early as possible.