I am a doctor and I have two children aged 18 and 20 years. I was told that if I can invest Rs 10,000 a month for at least 25 to 30 years, I can give them a lump sum of Rs 10 crore due to compounding of interest. Is this correct? If this is true, where should I invest? Should I consider a SIP or MIP or a bank deposit? Are they the same?
Dr Rajesh Kumar, AHMEDABAD.
Accumulating a lump-sum of Rs 10 crore with savings of just Rs 10,000 a month is not an easy task.
Your investment would have to grow at nearly 17% annually to fetch you a lump-sum of Rs 10 crore at the end of 30 years, if you invest just Rs 10,000 a month.
Now, this kind of a return is possible if you stick purely to stocks or equity mutual funds, but one cannot bet on it. Over the last ten years, for instance, the Sensex has managed just a shade over a 13% annual return — nowhere near 17%!
Higher monthly savings
Therefore, assuming you can take the risks of investing in pure equity funds, we would suggest you prepare to invest for a 30-year time frame and manage a higher monthly savings of Rs 15,000 towards this lump-sum.
A monthly investment of Rs 15,000 over 30 years could fetch you a lump-sum of Rs 10.5 crore at the end of 30 years, if it grows at 15% compounded annually.
A 15% return is not an unrealistic assumption to make when you invest in stocks or equity funds.
There have been times in the past when equity funds have delivered a 25 or 30% annual return. Any repeat of such phases could lead to achieving your return target earlier than expected. Therefore, do begin investing and don`t hesitate to cash out early if you hit your targeted lumpsum earlier than the 30 years you planned for!
The accompanying table should give you an idea of the lumpsum you can accumulate by investing in different avenues for 30 years. Now to the question of where you should invest. With your annual return target set at a fairly stiff 15%, you may need to invest the sum of Rs 15,000 in an equity or at best a balanced fund. These funds would see their NAVs swing substantially up and down with stock market movements, but you would need to hold on through the market ups and downs over a 30-year period to achieve your target.
You should go in for a Systematic Investment Plan (SIP) in two or three diversified equity funds with a good track record. Our suggestions would be: Benchmark S&P 500 Fund, DSP BR Top 100, HDFC Top 200 and Franklin India Bluechip Fund. Opt for the `Growth plan` to reap the full benefits of compounding, especially as you have a long horizon at your disposal.
A Monthly Income Plan (MIP) would not suit your purposes, as they are designed mainly to generate regular income for those seeking a pension-like payment. MIPs invest 80% or more of their portfolio in debt instruments with a small equity exposure of 10-15%. They are quite unlikely to manage the 15% annual return that you require. Investing in a MIP or a bank deposit would be much safer certainly, but doing this cannot fetch you anything close to the lumpsum of Rs 10 crore that you are aiming for, in 30 years.
MITUL SHAH
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