As a prudent investor, you need a well-defined financial strategy for a comfortable and secure future. Financial discipline involves saving more money, cutting down unnecessary expenditure and making well-planned investments. Plus, an efficient financial plan must also account for inflation rates to set financial goals correctly.
With a disciplined approach to investing, it is not difficult to grow your money to become a crorepati. But, where can you invest? Enter, mutual funds.
To understand what is a mutual fund: it is a professionally-managed investment vehicle where multiple investors can pool their money and earn returns on the capital invested. Equity funds, debt funds and hybrid funds are the three main types of mutual funds you can consider.
How can you invest in mutual funds?
There are two ways of investing in mutual funds – Systematic Investment Plans (SIPs) and lumpsum investments. While lumpsum investments involve making a large one-time payment for mutual fund investments, a SIP investment allows you to invest small amounts at regular intervals. These intervals could be weekly, monthly, quarterly, semi-annually or annually. You can start investing for as low as Rs.500.
How can you use SIPs in mutual funds to grow your wealth?
Since investing via SIPs involves investing at regular intervals, you can enter the market at different stages of the market cycle. So, when prices are high, you automatically end up buying fewer units. Conversely, when prices are low, you could get more units. This helps spread or average out the purchase cost over the long run, also known as Rupee Cost Averaging.
The earlier you start making SIP investment, the higher is the compounding effect on your savings.
For example, at the age of 20, if you begin investing Rs.1,581 per month at 10% rate of return, you could amass Rs.1 crore by the age of 60.
But if you invest Rs.5,000 per month at a steady rate of return, you could accumulate the same amount by the age of 49. Similarly, if you continue to invest Rs.5,000 per month till you reach 60, you could amass Rs.3.16 crore.
Thus, the corpus amount you build depends on the SIP amount and the investment horizon you stay invested.
If you want to achieve more in a shorter time frame, increase your SIP amount to meet your financial goals. Hence, for instance, if you start investing at 40, you will require Rs.13,169 per month to reach Rs.1 crore by the time you retire at age 60, given all other conditions are the same.
You can use a SIP Calculator to calculate the returns you would earn on your SIP investments and also tells you how much you would need to invest every month to earn a target corpus.
Thus, the key is to start investing early and stay invested for as long as you can to let the compounding effect take over. Also, remember to work towards building a higher investment corpus, in case Rs.1 crore may not be enough to cover your needs after 20 years.