Investing in mutual funds can make you a crorepati

Over longer time frames of 20-25 years, a diversified equity fund or multi-cap fund can outperform with low implicit risk.

Mar 29, 2019 03:03 IST India Infoline News Service

In India, the word Crorepati has a certain exclusive tinge to it. It rings of an exclusive club of people with tony lifestyles. Ideally, these were people who had inherited a fortune or had chanced upon a good investment and held on, more by default than by design. Of course, there were the occasional incredibly intrepid men who made their money by taking on big risks. That exclusive club of people still exists and always will. The idea is all about becoming a planned crorepati. Thanks to the power of mutual funds, that is possible today. Here is how.
 
I can save Rs10,000 per month; can I become a crorepati?

The answer is a conditional “Yes”. Leveraging the power of mutual funds to create wealth has three basic conditions to be satisfied:
  • You need to give yourself adequate time
  • You must be invested in equity equivalents
  • Discipline to sustain the investment is paramount
 
Let us look at how monthly saving of Rs10,000 per month can help you become a crorepati.
Product Monthly SIP CAGR Yield Time Period Final Corpus
Beta Index Fund Rs10,000 12.50% 20 years Rs1.07 cr
 
In the above illustration, it is clear that you are not taking any undue risk to become a crorepati. This is more of a systematic and disciplined beta approach. Equity funds over the last 10-15 years have given anywhere between 14-15% returns annualized. You could have earned 12.5% safely in an index fund itself. So you can save as little as Rs10,000 per month in an index fund in a sustained manner over 20 years, and end up with a corpus of Rs1.07 cr. It is not just the discipline but you have also made money work hard for you. Your total contribution over 20 years is just Rs24 lakhs and your eventual corpus is 4.46 times that. But a lot of people starting out in mutual funds may not have the liquidity or the conviction to commit Rs10,000 per month. What can they do?
 
Give me a lever long enough; and I can move the earth
If you recollect these famous words of Archimedes, you will understand what the entire concept of becoming a crorepati through a mutual fund is all about. Wealth creation via mutual funds is about tweaking the time frame and your risk without compromising your goals. For example, if the investor can only allocate Rs5,000 per month, then the time frame and the yield will have to be tweaked accordingly. Here is how!
Product Monthly SIP CAGR Yield Time Period Final Corpus
Alpha Equity Fund Rs5,000 14.00% 25 years Rs1.36 cr
Theta Multi-Cap Rs4,000 15.00% 25 years Rs1.31 cr

Actually, putting 20-year money in an index fund will be underplaying the opportunity. A better way to do it would be to opt for a diversified equity fund. The diversified equity fund can grow just Rs5,000 per month into a corpus of Rs1.36 cr. Of course, you will have to look at a slightly longer tenure of 25 years. And, if you opt for a multi-cap fund, you can reach a similar corpus with a smaller monthly outlay of just Rs4,000. The wealth ratio is also substantially higher at 9.06 times and 10.92 times in the above two cases.
 
Over longer time frames of 20-25 years, a diversified equity fund or multi-cap fund can outperform with low implicit risk. In both the cases, you can also be a crorepati in post-tax terms; which is what ultimately matters! Don’t fret about becoming a crorepati, just start your investment plan today.

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