A few days ago, I did a post on How You Could Create a Corpus of Rs 8.4 Crores Starting with Just Rs 10,000 every month. In the post, I analyzed following 3 scenarios over a period of 30 years (with approximate results):
- A Fixed SIP of Rs 10,000 every month (= Rs 3.24 Crores)
- An Increasing SIP, Starting with Rs 10,000 every month & 10% Annual Increase (= Rs 8.40 Crores)
- A Fixed SIP of Rs 26,000 every month (= Rs 8.40 Crores)
In all the above scenarios, the assumption for annual returns was 12%. Now this number, according to me is quite conservative because of the following points:
- In last (almost) 2 decades, Indian markets have given higher returns (in excess of 15%).
- Well diversified, actively managed mutual funds have delivered returns of more than 18% for almost a decade.
- If risk-free instruments like NSC, PPF give close to 9% return, then there is no point going for equities as an investment class if expectations are less than 10%
- Indian Growth Story is still intact. And till the time India becomes a developed economy, it will continue to grow at a reasonable pace. My guess is that India is still 25-30 years away from becoming a mature and (real) developed economy – in terms of quality of life, industrial might and similar things.
The last point is my personal assumption (speculation). And there were few readers who had the view that 12% average returns in not sustainable for next 30 years. Some of the views were that as the economy grows and matures, inflation would stabilize and reach levels close to 2-3% as in the case of US and other developed economies…so figuring in dividend yield and the equity return risk premium, Indian markets might give 9% to 10% return 30 years down the line… AND….Premium above inflation is bound to reduce as inflation decreases as the economy matures.
Now I am not saying that my assumption of 12% is hundred percent correct. What I am saying is that I am slightly more optimistic about India in next 30 years. I know I will not get 20% returns from market. But I ‘think’ I will be able to make more than 9% average returns over the next 30 years. Because if I am not able to manage that, then I will rather buy risk-free options like PPF, NSC, etc.
But more importantly, what I think a lot of people are missing in last post is the fact, that the 3 scenarios discussed show the real power of long term, sensible investing.
Ask anyone who is close to his/her retirement and chances are that they may not have crores in their retirement funds. I have people asking me questions like ‘What should I do if I have Rs 10,000 every month to invest?’
The previous post is an answer to that. No matter where you are and what your current financial state…you can start now!
Believe me… Equities have the ability to make you rich. Really rich… All you need to do is to be disciplined and stick to simple investment ideas.
Note that in all the scenarios, we are assuming a 30 year tenure and equity return of 12%. These numbers can change depending on change in tenure and equity return…you can either keep an assumption of 10% for next 30 years OR 12% for first 20 years and 9% for remaining 10 years. But the overall conclusion remains same – Do your SIP diligently, however small it may be. And whether or not, you are able to increase it every year. You will be positively surprised at the money you have accumulated at the end of all those years.
I think we need to look at this in 2 different parts : 1 ) Assuming lower rate of returns – Leading up to the dot-com bubble in the US, people were very enthused about the stock markets ability to deliver double digit returns in perpetuity.And why not ? They were in the tail end of the longest bull market ever recorded in world history. When the bubble crashed ,and the market returned to saner valuations , a lot of investors got short shrift , because they got accustomed to the market delivering consistent returns for so many years and got lulled into saving much less than they should have. Then they got disillusioned and moved from stocks into real estate , which again had pretty much the same end.Now, look at what is happening in the Indian stock market these days. A lot of investors , not having seen the 2008 crash , has come to think making money in markets is easy and wants “only” 25-30% CAGR returns. They would not save as much as they should and this would seriously compromise their goal achieving ability.
2) Investment returns taking into consideration interest rates and inflation – Equity returns or any other asset class returns should be evaluated based on prevailing interest rates and inflation. If inflation tends to be in the range of 2-3% and Government of India interest rates are in the range of 4%, equity returns are in the range of 9%. Isnt that a good option ? Now if equity returns are in the range of 9% while PPF and NSC returns 9% , then we can go all-out in debt options ( but that means our economy is not at all worthwhile investing in :)). But if debt options give 4-5% , equity returns giving 9% is a great deal in my opinion. Now ,I'm not mildly optimistic about our economy, but very optimistic:). But should I assume 18% returns for 30 years? I prefer to assume 18% returns for 10 years , 12% for next 10 and 9% for next 10 ( due to economy growing and base effect ).Now what does this force me to do ? It pushes me to save much more than I would if i assumed higher returns. So I'm setting up myself for very minimal downside ( if my assumed pessimistic returns come true) and much higher upside ( if 18% returns come to reality ) . Now I have a win-win situation in all scenarios and that is good , no ? 🙂
In this context , you pushing people to keep increasing your SIP amount every year , makes absolute sense!!
As the economy grows, the return gets lower due to higher base affect. So the growth is not linear but a decreasing one. The calculation of the increasing SIP are done taking linear growth. I think the last scenario would give most returns in practical scenario and with lesser capital. Additional capital can be used to accumulate during crash years.
What you say makes a lot of sense Nishanth…Keeping lower expectations (hope) when projecting into decades is a wise thing to do. Probably in the case which I did in previous post, to tone down the numbers….we can take 12%, 10% and 8% for each of the decades. And as you rightly pointed out, will be augmented by the increasing SIP.
Really liked the clarity of thought you put forward in point 2).
Yes Nitin…the last scenario gives maximum returns with least capital. And have done some analysis on using money parked as Crash Funds in a post. Would like to refer you to that post.
The post was about getting a corpus of 8.4Crore or so in 30Years.
At the outset, setting a simple value without any goal is not the right thing do in investment. As the goal and duration will decide the inflation that one need to take in to consideration and that may vary according to the type of goal ranging from life style expenses to medical to education etc.. Moreover, as you reach near the goal say last 5years one should be fully in debt and that returns should be incorporated in the financial plan (say a post tax FD rate of 5 – 6% in todays interest rate). This is to ensure that you don't end up in a 2008/2009 like period when you need the money to meet the goal expense.
Assuming a futuristic goal is 30years away and the required corpus is 8.4Crore (in 30th year)and the assumed value of the inflation is say 6% in 30years and as one of the reader was pointing out that if the inflation comes down to 2 – 3 % as the economy moves in developed market zone and the returns assumption is toned down to 12, 10, 8 or so. In this case, if the inflation falls to 2 – 3 %, the already worked out target of 8.3 crore based on 6% inflation need to be recalculated at that point and at that point the target value of the goal will also come down due to lower inflation and there is nothing to worry about that.
In otherwords, one should safely assume that equity over a longer period of 10years or more is likely to deliver atelast 5% over the inflation and by that helps you to reach your goal with a lesser investment amount.Also one should include the the last 5 years to target period retruns as post tax fd kind of returns (which is say 1 or 2% less than inflation). It should be noted that the debt return in switzerland is currently negative, and this is due to deflation in eurozone.
Bottom line: Inflation is a crucial factor that will decide the target value and simple SIP without any target value is meaning less.
Further say that your goal was to buy a prime land in a prime locality, then the inflation figure one need to incorporate in the target could be even 15% or higher in some case, then all your investment return calculation based on 12% or 10 or 8% return is going to push your investment amount much higher.
My take from Dev's post is that one should have a habit of going for SIP in equity for long term goals and that one should increase SIP amount annually as you progress in your life. It is not about the value or the returns expectations.
Would it be possible for you to share the excel file for SIPs you made for your last post?
HI dev,hope you are doing well.last time when you posted I just read as usual but today suddenly some thoughts came to my mind and I am here with my query.I am single and doing my SIP regularly for retirement,marriage and honeymoon ( yes if you want luxurious one you need help of equity).May be after 2 years I will change my status as married.till then if I increase my SIP of retirement around 50-65% more than the current one and then continue to do so till child born.so this 3-4 years of extraa added SIP makes any BIG impact on the corpus.
Ofcourse Aakib… The sooner you add more to the investment pot (which is required later), better it is. By the way, I am happy to see goal oriented investment approach which you are following. 🙂
I am 28 years old. I have been investing Rs 26,500 per month in SIPs since last 6 months. I plan to stick to this for long term, till my retirement(62). I will increase Rs 1000 investment every year. Is it the right approach?