Creating Weatlh

We are going to discuss today, how a huge wealth can be created by in vesting with discipline over long period of time . We often think that investing a small sum of money will not be able to generate huge Wealth and we need to invest huge amount of money . Its obviously true that more money will create more wealth , but we are going to see today that we underestimate small savings and how small investments over a long period of time can generate fortunes.

How much wealth you can create, if you earn around $1000 /month (Rs 40,000 per month) and can invest 10% of that amount every month for next 30-35 yrs . I am assuming you are a 25 yrs old and retiring at the age of 60 (though i want to retire at 40) . Total dependents are 3-4 . And monthly expenditure is Rs 25,000 ($600/month) .

What kind of wealth can this person create ?

Can he invest Rs 5000 ($125) in a diversified Equity Mutual fund per month till his retirement. I hope the answer can be YES

As we said that he is investing in Equities , What kind of return should we expect ? 5% , 20% or 50% , but Wait … Equities are risky , it can be negative also !!! . that’s very true … but People may not know that Equities are extremely risky in short term, but its almost not at all risky in long term , and if the long term = 35 yrs , then forget it , you can get some great returns. Risk in Equities are inversely proportional to the investment tenure. Well that’s a different topic to talk about (And i will post an article on that soon , keeping an eye !!!) . Just for the data , Indian Stock markets have given return of 17%+ CAGR return in 28 years , from 1979 (inception) to 2007 . We are talking about Sensex.

So, to be safe we can easily consider 15% CAGR return in Long term (remember LONG TERM).

Coming to the point , It may happen that during initial years ,our investor may face difficulty investing this much money considering , he may have other important things to take of and later he may have more responsibilities. But during is career life , his salary will also rise and then 5000 will be a small percentage of his salary . So assuming he can do the investment we are proposing , what kind of retirement corpus he can build? Guesses ?

I am sure most of the people will be thinking the following way:

He invested 5000 * 12 in a year , which is 60,000 , and then he does it for 35 yrs , so he invests total of 60,000 * 35 = Rs 21,00,00 0 (21 lacs) . And he will get some return of 15% every year. if we take 15% of this 21 lacs , it will be around 3,00,00 , so total corpus = 24,000 and also as this is compounded , his interest will also keep growing at 15% , so it will be more than 24,00,000 , so lets take it 50,00,000 . Fine …

Ok , let take 70,00,000 (70 lacs) to be safe. This is a calculation done not exactly by the proper annuity formula, but a workaround , which a general person can think of.

How much does he generate with this strategy

You can also look at my another article on Early investing and power of Compounding to get an idea about early investing and how compounding is a great tool. But keep going ahead if you are enjoying this article.

So the question is What will be his corpus , can it be anywhere near to 70,00,000 . The answer is that his actual Wealth will be way beyond this amount. After doing the actual calculation i can see that it will come around 7.43 Crores (Rs 74 million) . But how is it possible , such a big amount !!! . That’s because of compounding power . The interest earns interest and that again earns interest and this keeps on going. Initially the interest earned is very small , but as the time passes , the amount keeps growing and the interest also grows at an unbelievable amount. Can you believe that this investor will earn more than 1.04 Crores only in interest in his 35th year (last year) , more than 4 times the money he actually invested whole his life. That’s all possible because of systematic and consistent investing with out fail and because of Power of compounding.

Thats the reason why one of the greatest Scientist Albert Einstein said “Compound interest is the 8th wonder of the World”.

So it that all we are going to talk about today , NO !!! We have more to talk on this topic .

Why does this investor takes pain of investing that 5,000/month all this life. What if he invests just 10 yrs and leaves that money to grow for another 25 yrs. What if this is his plan till retirement.

The sudden thing which will come to your mind is that he invests for 35 yrs and created wealth of 7.43 crores , What if he just invests for 10 yrs .. it should be 10/35 * 7.43 crores = 2.12 Crores . Is that true ?

Will it actually be 2.12 Crores only. The answer is NO !!! . Then the question is how significantly different will his Wealth be in this case. The Answer is 5.88 Crores. Yes it will not be significantly less but just 21% less . So Just by not investing for 71% tenure he actually gets 21% less money , thats not a bad deal !!!

But wait , What if he wants that same 7.43 crores at the end , and still wants to invest for 10 yrs. the obvious way out is to invest more than his regular 5,000 per month . The question now is HOW MUCH MORE !!!

The answer is Rs 1420 more . Instead of 5,000 , he should invest Rs 6,420 per month for 10 yrs and then leave the money to grow for rest of 25 yrs. And he can generate wealth of Rs 7.43 Crores.

What we can learn from this

So there is a learning here and a very important thing to note , that more pain we take in the start , the better it is . In the initial years of career , its possible for people to invest more , as they have less responsibilities to handle and less dependents. So it may be feasible for them to invest heavily in the initial phase of there career, which will benefit them for long term . Now see this person . Instead of investing 5,000 for whole of 35 yrs , If he chooses to take a little more pain in the initial 10 yrs and manages to invest Rs 1,420 more per month , then he can save investing for 25 yrs of his life and still can generate same Money.

One great question now !!!

What if our investor is ready to invest his 50% salary (20,000) per month for starting 2 yrs and then let it grow for rest 33 yrs. He is ready to heavily invest first 2 yrs of his career and do some sacrifices like not spending too much , no vacation , no fancy spending and all.

Can he still beat the target !!

Will he be able to generate the same Wealth for himself like in earlier examples !!

So here you go !!! , He will not only achieve the target , but exceed it . His Wealth will be 9.24 Crores (Rs. 92.4 million) at the end of 35 yrs. I know that’s an Eye-opener . So now you know that the best time to invest was 5, 10 or 20 yrs ago , but if you missed it , don’t worry 🙂 . there is another golden chance and that’s NOW !!! .

please let me know what you feel about this article , that helps me to refine and write better articles .Thanks , Happy Investing

Note: The formula used for calculation is called Annuity. http://en.wikipedia.org/wiki/Annuity_(finance_theory) See formula under “Annuity Due” on this wiki page

Murtaza

Hi Manish. I am thankful to you providing such useful information and guidance particularly for salaried persons like me who are thinking of investing their money but know nothing of it. Your article is a great help. thanks a lot

Manish Chauhan

Thanks Murtaza

Incase you are starting your investments , our team can help you setup things and do mutual funds ..

Fill up this form if you want – http://www.jagoinvestor.com/solutions/invest-in-mutual-funds

Ganesha

Hi Manish,

Thank you very much Manish, its a very good article. But I have a query, its about compounding in MF NAV in Growth option.

Suppose I’ve bought 1000 units each of 10RS. After 20yrs NAV might be 40rs, So my total NAV value becomes from 10000 to 40000, So I am not getting from where compounding works here. I’l get more amount only if NAV value increase by that time.. So Please explain me how this compounding works in Growth option.

Thank you very much,

Ganesh

Manish Chauhan

Compounding in equities is not like in FD. When we say you will get compounded returns in mutual funds, we mean to say that when you will see returns in future, it will turn out to be 12-13% compounded, Its a way of saying the potential returns one will be getting in mutual funds.

Buddhdev

Hi Manish,

After reading your different article about investment I would really like to say Thank you very much for sharing such useful information with investment enthusiastic. it really boost the confidence of an individual who wants to invest money for long or short time period once they have clear idea about what will be the return of their investments.

Manish Chauhan

Glad to know that Buddhdev ..

Dinesh

Hi Manish,

I have read your article. It is too good and insightful and praise worthy. I am 35 yrs. old and I have started investing Rs. 20000/- per month in directly stocks viz., Havells India – Rs.7000/-, ITC – Rs.7000/- and HDFC – Rs.6000/-. I want to continue investing for the next 15 to 20 years. Kindly suggest me whether this strategy is good or any modifications required.

Manish Chauhan

Its good enough. Just keep tracking everything

Babu

My age is 24.I want to invest in reliance tax saver uti opportunities hdfc equity fund 3000/fund Fr 4 Years.Is dat gud performer or should i change?

Manish Chauhan

Its a good fund !

Manoj A

Hi,

Can anyone let me know what is the total value required for one to retire at the age of 40, considering life expectancy of 85 years.

Average present monthly expense of one lakh.can Can you pls mail me in detail.

Rgds

Manoj

Manish Chauhan

You will need 4 crores today

Kedar Sunku

Hi Manish

your article is simply superb , it helps for youth to explore different ways of getting income . I have a doubt that its mentioned 5000 per month through out 35 years we should invest and later in article 6420 per month for 10 years is sufficient again or 20000 per month for 2 years is sufficient and told to leave it . all the total sum of three methods is different . How could all three different final amounts lead to a same corpus of some crores .

2)suppose i pay 5000 per month for 2 years , and later i think to pay 20,000 per month for some years. is there any fixed years to invest?? , is there any fixed target amount to reach ??

Manish Chauhan

Kedar

Its different , because the tenure is different .. The amount is high , if in start you do not invest much , but its less if you do early investing ..

Vishwajeet

Dear Manish,

I have gone through your blogs. And this is really fabulous and wonderful. It is really very helpful. Kudos for your suggestions. I have started investing Rs 15000 monthly in the below mutual funds through SIP from Jan 2015. Will you please comment on the below funds? Have I chosen right funds? Or, Do I need to re-consider on the below allocation. Thanks in advance!!

ICICI Pru Focused Bluechip Equity Fund Reg Plan Growth – Large Cap — Rs 1000

SBI Blue Chip Fund-Growth — Large Cap — Rs 1000

Franklin India Opportunities Fund (G)—Large Cap— Rs 1000

Reliance Tax Saver (ELSS) (G) —- ELSS —- Rs 2000

UTI MidCap Fund—– Midcap—Rs 3000

RELIANCE SMALL CAP FUND – GROWTH — Small Cap—Rs 4000

Franklin India High Growth Company (G) — Diversified Equity—-Rs 2000

HDFC Balanced Fund (G) — Balance Fund — Rs 1000

Best Regards

Manish Chauhan

These are all great funds. However I think you should have just chosen 2-3 funds .

bhaskar

Manish! excellent article . recently i invested 50k in SBI Blue Chip Fund – Direct Plan – Growth for long term like 20 years.

Manish Chauhan

Thats great ! .. congrats !

pandherds

Dear Manish,

Your article is an ‘eye-opener’…how I wish we were wise a few years back.

Nevertheless, I have started Rs.5000/- SIP in 5 Top Equity Mutual Funds for next 5 years.

Will keep an eye on their performance every year, as suggested.

Will see you again after 5 years of rich experience….keep up the Good Work!!!

Regards,

Darshan.

Manish Chauhan

Great to hear that !

SS

Hello

I have just now means today only for the first time started reading the articles of Jago Investor Blog and I now discovered that how one can make most out of the money and not only money..many other aspects of life which are very important which one must know!! I thank you for posting such a great article..!!

I am 43 years and working, can you suggest me some MF investments for my retirement plan i can invest upto 7000 monthly already have one sip ICICI pru for tax saving and LIC policy and PPF.

Thanks & Regards.

Manish Chauhan

Hi Suman

Thanks for sharing your views 🙂 . I must say that you are very new right now, so please go slow and spend some time first on these things . After 1 week, start taking actions 🙂

Utsav

Hello Manish, Wish u a Very Happy New Year 🙂

I Have a SIP of Rs 1000 per month in HDFC top 200 since 9 Months. After reading your article.

I am 28 & wish to invest 5k per month more towards generating the corpus of % Crore required for my retirement.please suggest me a brief plan and some good MF’s where i can invest for next 25 years which gives approx 15% return . I am not frequent watcher of fund performance & wish to continue with same funds for the whole accumulation period.

Your Help is highly appreciated.

Regards,

Utsav

Manish Chauhan

Hi Utsav

Please ask a close ended question point wise. Just asking suggest me a good plan will not work . I would suggest you to take help of our forum http://www.jagoinvestor.com/forum for this

Chetan Ambi

Excellent article on how to create long term wealth Manish !! Lucid explanation. Keep going.

Manish Chauhan

Thanks Chetan

But are you applying these 🙂 ?

Chetan Ambi

Of course I am Manish. Else what’s the use of just reading the jagoinvestor articles and not applying. I am using MF’s and PPF for long term wealth creation from past 8 months. After getting salary hike this month I hv increase SIP amount also. Also I ll keep visiting MF performance for every 6 months or so. Thanks to jagoinvestor !!

Manish Chauhan

Good to hear that ! . you are a star commentator !

Kuppusamy K

Hi Manish, have a doubt, whether in super annuation , the interest on the contributions are distributed as pension or the contribution itself will get distributed as pension after retirement. Pl. clarify

Manish Chauhan

Even the interest should form the part of pension

Poojan

Hi,

I am 27 years old and earn 70k per month. I can invest 15k per month. Last week my dad enrolled me for jeevan anand policy where i will invest 5k each month for the next 25 years and will get 40lacs at the end of that. I am not sure how to invest my remaining 10k and what returns can i expect. I want to invest in such a way that i get a lumpsum amount in 15 years from now. Some names i have heard are RD/PPF/ULIP/MF and the likes. Please advice where i can invest and what returns i can expect. Also, if you suggest lets say MF, then please also help me out with which MF you suggesting. Thanks in advance.

Manish Chauhan

First, I want you to relook into your LIC policy, where did you read that you will get 40 lacs after 25 yrs ? What is the surity on that ?

Poojan

It is jeevan anand policy. Monthly premium is Rs.5167. Guaranteed Bonus Rs.15 Lacs. Non-Guaranteed benefits: Bonus- Rs. 17Lacs + FAB Rs.675000.

Dhiraj

Hello Sir

First of all thank you so much for such a wonderful site where a person can learn so much.I have been reading your articles from last 2 years and its been a wonderful experience with so much to learn.

Coming to my query I am 23 years old recently started working with a mnc.I want to invest Rs 2000 in pure equity fund for long term 30+ years.I wanted to ask which fund to choose as their are many good Mf’s in the market.Please reply asap so that I can make a first step towards financial freedom 🙂

Keep up the good work 🙂

Tc

Manish Chauhan

Dhiraj

You can start with DSP BlackRock top 100 or HDFC Prudence !

Deep Ajmera

Hello

I have started reading the articles of Jago Investor Blog and I now discovered that how one can make most out of the money and not only money..many other aspects of life which are very important which one must know!! I thank you for posting such a great article..!!

But I also have one query for the post..My question is..Wont the Inflation erode the amount earned?..Can I have a calculation which considers the Inflation rate as well as Interest rate? What will the resultant amount received then?

Deep

Manish Chauhan

Yes Deep

You will have to consider Inflation . What I suggest is that you use EXCEL to calculate this !

Jasvinder

thanks manish