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How to become a crorepati

How to become a crorepati

When it comes to investing for long-term goals, equity mutual funds (MFs) are increasingly becoming the first and the right choice for most investors. A well-diversified portfolio of MF comprising of carefully selected schemes that have consistently generated benchmark-beating returns over different market cycles may go a long way in accumulating a sizeable corpus for your long-term goals.

However, before you start investing, it’s better if you list down all your goals with their present cost and duration as well. Thereafter, estimate its inflation-adjusted cost, which becomes your target amount to save. Now, to reach that target amount, you have primarily two routes to choose from — Invest a lump sum or start a systematic investment plan (SIP). If you have a lump sum to invest, nothing like it, but for most — especially salaried individuals — SIP holds the key to long-term wealth creation.

In an SIP in any of the chosen MF scheme, one keeps on investing a portion of one’s income into the market automatically. In addition to the MF scheme application form, one merely needs to fill up an SIP form and a form to set up debit instruction for one’s banker. In an SIP, a specific amount will go into the MF scheme from one’s bank savings account and units allocated in the name of the investor. For long-term goals, SIP builds in a disciplined approach towards savings and also helps avoid the temptation to time the market.

Here is how to create corpus of Rs 1 crore

SIP requires a fixed amount to be invested in the selected MF scheme. Some MF houses allow SIP of as low as Rs 100, while most allow Rs 500 to be the minimum SIP amount. While a regular SIP requires a fixed amount, in a Step-Up SIP or an increasing SIP, one may opt to increase the SIP amount by a fixed amount or a fixed percentage every year.

For example, in a Step-Up SIP, one starts a monthly SIP of Rs 3,000 and after a year, increases the SIP amount by 10 per cent, i.e. Rs 300. So, in the second year, the monthly SIP investment amount becomes Rs 3,300. Similarly, for the third year, the monthly SIP investment amount becomes Rs 3,630 and so on.

An optimal use of a Step-Up SIP may help one to create a corpus of Rs 1 crore or more in a duration lesser than what it will take in a regular SIP.

Here. we look at how to create corpus of Rs 1 crore by starting to invest Rs 2,500 each month and then increase it by 10 per cent annualy over 25 years.

In a regular SIP, by investing Rs 2,500 a month for 25 years at an assumed annualised growth rate of about 12 per cent, the maturity amount comes to about Rs 47.50 lakh. The total investment in terms of principal invested is Rs 7.5 lakh, while the gains are nearly Rs 40 lakh.

In a Step-Up SIP, at an assumed growth rate of 12 per cent over the same tenure of 25 years, if one increases the SIP amount every year by about 10 per cent, the maturity value crosses Rs 1 crore.

Depending on the need, the numbers may change but the idea is to keep enhancing your savings so as to reach your goals early and with ease.

An important factor to consider here, is that the range of SIP amount over these 25 years. While your monthly SIP will start with Rs 2,500, by the time you are in the 25th year, the monthly SIP amount will be about Rs 24,624. The total investment over 25 years will amount to about Rs 29.50 lakh.

In the Step-Up SIP, a higher corpus is a reflection of the fact that there are more number of units as the amount of savings is more. Remember, the units purchased in the early years will have more time than the units bought in the later years.

Why increasing your savings help

With age, one is expected to see a rise in one’s income. In the initial years of career, the quantum of savings may not high but as one continues to rise the corporate ladder, the income as well as the propensity to save increases. Also, with inflation around, in a Step-Up SIP, the savings get inflation-adjusted and thus takes care of the falling purchasing power of the currency. Step-Up SIP helps in such circumstances.

What matters is the return which will depend on your selection of the right category and the right scheme? either large-cap, mid-cap or index funds. You may start SIP with an amount that you are comfortable with or which is in line with your needs, but opting for Step-Up SIP will help you reach your goals with ease and without the fear of under-investing.