A lot of individuals don’t start investing their money till much later in life because they think their savings are too small to amount to anything significant.
Nothing could be farther from the truth.
Even if you earn Rs 25,000 and are able to save Rs 5000 per month, your monthly savings can grow into a significant amount if you invest it for a long term period ( 7 years and more)
Let’s look at the past performance first.
Let’s assume you had invested Rs 2500 each in two funds as follows:
- HDFC Equity Fund in 1995 for a period of 20 years till 2015
- Reliance Equity Opportunities Fund in 2005 for a period of 10 years till 2015
In the Reliance Fund, your monthly investment of Rs 2500 for a period of 10 years would have grown from Rs 3 lakhs to a current value of Rs ~9 lakhs. Your money has grown at an annual rate of ~ 21.5% and has handsomely beaten inflation.
In the HDFC Equity Fund, your monthly investment of Rs 2500 for a period of 20 years would have grown from Rs 6 lakhs to a current value of ~Rs 1.25 crores. (Yes, you read that right ). Your money has grown at an annual rate of ~ 20.7%
So while both the funds delivered almost the same annual rate of return, the difference in the end corpus is in account of two factors:
- The power of compounding over a long term (20 years vs 10 years)
- Greater growth in the stock market over the last decade.
Take a look at the images below. You will notice how the fund values have fluctuated with the rise and fall of the stock market. That’s why SIPs are such a great investment tool. Since you are investing a small amount every month, you buy when the markets are low and again when they are high. Over a long period of time, your cost is lower on account of a concept called Rupee Cost Averaging.
Hmmm, that’s great but it’s past performance. What about the future ?
That’s the thought which is probably going through your mind.
You are right as nobody can predict the future. However, there are still significant opportunities to create a great amount of wealth over the long term in India from Equities as an Asset class. That’s because unlike the US, we are still just a $2 trillion economy and poised to grow much much larger as domestic consumption increases.
Since you can’t predict the stock markets too, the most important thing is to start now.
Want to know how much can your money grow ?
If you invest in Equity SIPs over a long term, you can expect it to grow at around 12 – 15% per annum. Even if you start with a small amount every month, you can grow your money quite significantly.
Whatever you do, please don’t leave your money lying in the bank as it just gets devalued by inflation instead of growing.