POWER OF COMPOUNDING + RUPEE COST AVERAGING
We’ve
all heard about the Systematic Investment Plan (SIP) and the ‘SIP sahi hai’
campaign and if you’ve not, then you must act upon it right now.
This is perhaps the most
lucrative and bankable way of investing and creating wealth. Many of us belong
to the salaried class and some of us are professionals/business owners who draw
a monthly amount and the third category of people earn every month but are
unable to save any money.
The SIP format of investing helps all three categories of people in wealth
creation.
As explained in the previous blog, Equity market returns have a positive
correlation with your age. i.e. the earlier you start, the more wealth you can
create.
Before investing, one must understand that equity market returns are non-linear
in nature, i.e. they don’t go up in a straight line. Hence, the trick is to
invest small amounts on a monthly basis consistently. By doing this we are taking
advantage of volatility and averaging the cost of the asset. The exponential
nature of equity returns is best explained in the table below.
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TABLE SHOWS - SIP of Rs.10,000/-per month |
A monthly SIP of Rs.10,000/- for 5 years having total invested amount of
Rs.600,000/- gains Rs.248,000/- considering the historical average return of
13%. As we double the tenure, the same recurring investment of Rs.10,000/- for
10 years, the gain is 5x of the previous tenure and not just a mere double. This
is the exponential nature of Equity markets and Equity returns.
Now, coming back to the topic and guiding you to make a million dollar in a
simplified manner.
All we have to do is a monthly SIP of Rs.20,000/- in a Nifty 50 Index fund
which on a long term basis gives a compounded annual growth rate (CAGR) of
13%-15% per annum. Considering 13% as our average return, the following is our
table.
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TABLE SHOWS- SIP of Rs.20,000/-per month |
By investing merely Rs.20,000/- consistently every month we have achieved a
corpus of Rs.8. crore+.
This sounds easy but there are some points to remember.
1. There will be a phase where markets are giving flat or negative returns. You do not have to redeem or stop the SIP. Maintaining consistency in your monthly SIP is perhaps the secret sauce to this entire exercise.
2. Since you’re investing in a Nifty 50 Index fund, you are simply betting
on India and the India growth story. As an investor, you should be optimistic. This is a must have quality for any investor.
3. I encourage you to use a SIP calculator available online, feed in the amount
you are comfortable investing every month and punch in 13% as your average return
and see for yourself the magic and power of SIP.
4. Plan well, do not over exceed the amount just because you are having a great month or year. Investing erratically may not give you the desired result.
Happy Investing!
