Recently, I happened to meet a distant cousin who is 25 years old. We got talking and as usual, we discussed savings (my bad). And about his savings patterns.
He was, like many other young people out there, unable to grasp the power of equities in the long term. I asked him how he utilized his Section 80C tax benefits? He replied that a small part was addressed via the mandatory EPF contributions. In addition, he put some money in PPF and the remaining in (unfortunately) traditional insurance plans.
I asked what about ELSS funds which give equity exposure?
He said he wanted to invest but given the ups and downs of markets in the last year or so, he had doubts in his mind.
As I was, in any case, getting bored in the family function, I thought this would be a good chance for me to try to convince him about equity investing.
And given the ELSS funds have tax benefits, it seemed like a good instrument to base my discussion on.
So I borrowed his laptop and ran some numbers in excel…
Without burdening him with the whole asset allocation and other Gyan, I simply tried to show him how equity investing via ELSS funds, which also gave tax benefits could help him in the long run.
I built him a simple scenario.
I assumed that he started investing Rs 1.5 lakh every year for the next 10 years, i.e. from age 25 to 34 in ELSS funds. After the age of 34-35, no further investments would be made until he is 60.
He got excited. And he was more interested in not investing between 35 and 60 than he was about investing between 25 and 34. 😉
So I asked him to guess what would happen if this strategy of investing from 25 to 34 and not investing for 35 to 60 is followed?
He for some reason avoided making a guess but was eager to know what I was about to tell him.
I told him that by 60, he would have had about Rs 2.5 crores!
He did not believe me.
How could Rs 15 lakh in total (10 x Rs 1.5 lakh each year) turn into Rs 2.5 crores?
I said it was possible. And without assuming very high returns from equity.
I told him that in my calculations, I used 11% returns in the first 10 years, then 10% returns in years 11-20, 9% in years 21-30, and 7% returns in the last 5 years. I didn’t even consider the general 12% average annual return throughout the investment tenure of 35 years.
Here is the table I showed him to prove my case:
This got him mighty excited.
He himself said that it was amazing what Rs 1.5 lakh for just 10 years could do in the long run.
And I was happy when he asked me what would happen if he did not stop investing at 34 but continued till 60.
I showed him the numbers and that got him excited even more.
He was just unable to fathom till then those small savings could result in a big corpus later on.
But I also wanted to show him what was the cost of delay in investing, if he decided to postpone saving for later years, let’s say like after 10 years.
The scenario would then change to – He starts investing Rs 1.5 lakh every year in ELSS funds at the age of 35 and does it for the next 10 years, i.e. up to 44. After that, i.e. between age 45 and 60, no further investments are made. As for the annual returns, I used 11% returns in the first 10 years, then 10% returns in years 11-20, 9% in the last 5-6 years.
And the result was Rs 1.21 crore. Here is how it came to be:
By delaying his investment for 10 years (and starting at 35), I told him that he would end up with half the wealth of what was possible by starting earlier at 25.
As far as I could make out, these two examples atleast pushed my young cousin to take notice of equity as a viable option for long-term investing.
Now let’s see how investments in ELSS tax-saving funds have fared in the last few years.
Here are the year-wise returns of ELSS funds that have current AUm in excess of Rs 500 crore:
So that’s it.
A simple exercise that I hope proves that investing in equity is the way to go for long-term investors. I have written several articles on ELSS funds earlier. Here are the links to the same below:
- Should you invest more than Rs 1.5 lakh in ELSS funds?
- How to save Rs 1 crore with ELSS Funds?
- How many ELSS funds should you invest in?
- Don’t invest in a new ELSS fund every year
- SIP Vs Lumpum in ELSS schemes
- Be careful when investing in ELSS scheme on 31st March. Here’s Why?
- You need to invest Rs 500 more than Rs 1.5 lakh to get for ELSS tax benefit
- PPF Vs ELSS
- NPS Vs ELSS