A bank balance of Rs 1 crore is tempting to any salaried individual or a middle class person. But, the question is how to become a Crorepati? Making Lump sum or SIP investments into Mutual Funds can help in accomplishing the target in just few years.
If you want a bank balance of Rs 1 crore in 10 years you will need to invest Rs 50,000 per month. However, if you seek to make the same amount in half the time (5 years), the monthly SIP amount will triple to Rs 1.30 lakh per month. As you can see it is not just a numbers game; SIP amounts, period of investment and the type of fund can play a huge rule.
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 be 12% 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?
While you are speculating the ways and selecting the investment ideas to get you close to the answer of how to become a crorepati, here are some key points to be kept in mind to reach the 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?
In some cases, your plan might just slow down. Here are some of the reasons which can keep you from becoming a crorepati:
1. GDP Growth collapses: Political turmoil, war, long recessions, etc. can cause the GDP growth rate to go below 7%, (which it recently did and was at 5% in the second quarter of 2019) and remain stagnant 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.
3. Funds give negative alpha: The fund you have chosen could 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?
In resolving the query of how to become a crorepati with your investments, 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.
Also 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 in relative terms the purchasing power parity could lessen. Hence, you should try and invest as much as possible in order to achieve this target as early as possible.