The theme of this article is to indicate the importance of early investments and to answer the question
“How to make 1 crore rupees? “
One of the most important things that you can do as an investor is to get an early start on investing. The old saying, “The early bird gets the worm.” certainly applies to investing. Earning a profit is much easier if you get an early start. Investing at a young age isn’t always easy, but the benefits are numerous and can’t be overlooked.
Aman and Vandit are two friends working for a large multinational corporation, they earn about 1 lakh rupees per month. Aman is an open-minded person and is always thinking of new ways to increase his capital holdings. On the other hand, Vandit is a more conservative person who is skeptical about investing in stocks and mutual funds.
Aman also feels that there are many advantages of investing early at a young age, some of these advantages are:
1.)Provides ample time for your investments to provide a profitable return.
2.) Compounding returns are extremely powerful over the long run, and the earlier you get started the greater your chance is to take advantage of this. Compounding returns is the power of the time value of money invested.
3.) Investing early definitely helps develop positive spending habits. Those who invest early on are much less likely to have issues with overstepping their boundaries in spending over the long run.
Vandit feels that his money is safer when it is kept in a fixed deposit. Vandit has a very low-risk appetite and thus goes with a zero-risk option of putting his money in a fixed deposit. He also believes the common misconceptions that mutual funds require large investments and all mutual funds are long-term investments.
Aman is a very good analyst and a keen thinker and plans to invest part of his monthly salary in mutual funds. He believes that mutual funds have the apt amount of risk to reward ratio.
He narrows his options down to 3 mutual funds from the major categories, namely Reliance Small cap, SBI Large Cap and L&T Low Duration Debt Fund which is a type of Debt Fund.
He wants to invest a certain amount of money via SIP so that over a period of 7 years he can make a total return of 1 crore or above.
What are His Options?
1) Invest in SBI Large Cap Fund
From his analysis, Aman found that if he invests Rs. 63,750 every month from January of 2011 to December of 2017 in SBI Large Cap Funds, he will receive a net return of Rs. 1,00,01,708 (the goal of 1 crore reached !!).
Therefore, on the total investment of Rs. 53,55,000 he makes a final return amount of 1,00,01,708 , i.e. a rate of return of 86.7% over a period of 7 years.
2) Invest in L&T Low Duration Debt Fund
From his analysis, Aman found that if he invests Rupees 86,600 every month from January of 2011 to December he will receive a net return of rupees 1,00,03,273(the goal of 1 crore reached !!).
Therefore on the total investment of Rs. 72,74,400 he makes a final return amount of 10.003,273, i.e. a rate of return of 37.53% over a period of 7 years.
3) Invest in Reliance Small Cap Fund
From his analysis, Aman found that if he invests Rs. 37,275 every month from January of 2011 to December he will receive a net return of Rs.1,00,03,737 (the goal of 1 crore reached !!).
Therefore, on the total investment of Rs.31,31,100, he makes a final return amount of 1,00,03,737, i.e. a rate of return of 219.4% over a period of 7 years.
This further strengths the fact that debt funds are mutual funds that invest in fixed income securities like bonds and treasury bills and hence provide comparatively lower returns. Debt funds are meant for parking your money and keeping it handy so that you can redeem it as and when required.
Also, small-cap funds produce a higher return than large-cap funds as they invest in smaller organizations which have a higher risk but also have a higher growth rate.
Therefore, Aman goes with option 3 and invests Rs. 37,275 every month for seven years from January of 2011 to December of 2017 to get a total return of 1 crore+.
Vandit, on the other hand, decided to put his money in a fixed deposit in SBI bank with a rate of return of 6.75% per annum. therefor the maturity amount is Rupees 50,15,637. This is almost half of Aman’s returns in the same timeframe.
We hope that this scenario will teach you about the importance of early investments and importance of the right kind of investments.
Happy investing 🙂
Disclaimer: The views expressed in this post are that of the author and not those of Groww