Invest systematically & over time, the impact of compounding will make you rich. This method applies to all types of investors too
03-Nov-2014 •Research Desk
How to get rich is one of the most repeated question posted by readers of our magazines and website. The answer is simple; invest systematically and over time the impact of compounding will get you rich. This easy to follow approach is applicable to every type of investor; the low risk taker to those who can take more risk. The outcome for both will be the same; the difference being a low risk taker will take longer time to get rich over the one who is a willing risk taker.
To illustrate this method, we built five different scenarios taking into account investments in four different instruments: the PPF, SBI Magnum Taxgain (which has an over a 20-year history), the fund with the best 3-year return each year and the Sensex Total Return Index, which is nothing but Sensex which also includes dividends.
In each instance we took ₹1.5 lakh as annual investment, because this is the upper limit of what one needs to deploy each year to claim deduction under Section 80C to save on income tax. As we are not soothsayers to read the future, we took the actual data over the past 20 years of each these instruments to demonstrate wealth creation. Remember, the last two decade includes phases of ups and downs, scams, global events and events local to India, which collectively factor in the impact of these events to our finances.
The safety of PPF
One of the oldest tax saving instruments, the PPF has been an eternal favourite among a section of people. This fixed-return instrument has seen a fall in interest rates over the years, yet the ₹30 lakh invested over 20-years shoots up to ₹82.14 lakh, if one invested ₹1.5 lakh every year on April 1.
Following the benchmark
One of the most talked market indicator is the Sensex, that the index went up from 2,539 in 1993 to 27,025 in 2014 is testimony to the change in the Indian equity markets. In the past six years the Sensex went down from 23,000 to 8,000; only to bounce back and hover around the 27,000 mark now. Instead of investing in the Sensex; we invested in the Sensex Total Return Index, which is nothing but Sensex which also includes dividends. The results, when compared to investment in PPF is very good, but pales in comparison to investment in Magnum Taxgain.
Equity edge with Tax-savings
We have time and again championed the cause of this mutual fund scheme for not just the tax savings one can avail, but for the fact that this category of funds are open only to retail investors. There is case to invest in these funds for the three year lock-in they have and the fact that it can be a learning ground for anyone wanting to step-up the investing ladder. We selected SBI Magnum Taxgain because its one of the oldest funds in the category, it has seen its share of ups and downs and holds a Value Research 4-star rating. Investors in this fund would have been crorepatis. In case of lump sum investment, ₹1.5 lakh was invested every year, whereas in case of monthly SIP; ₹12,500 was invested each month. We have also redeployed dividends paid out by the fund.
For those who believe in the power of simplicity; we tried a sixth option wherein we increased the investment by 10 per cent every three years. The rationale being; one will earn more over time and would accordingly start investing elsewhere this additional sum. So, over 20 years you will invest ₹32.55 lakh, that is an additional ₹2.55 lakh. When we adopted this approach to investments in SBI Magnum Taxgain; it swelled the corpus at the end of 20 years to ₹2.98 crore which could take care of one's retirement comfortably.