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How fast can you become a crorepati, is Rs 1 crore enough?

How fast can you become a crorepati, is Rs 1 crore enough?

A crore might not be enough. Why do we say so? Well, a number which looks big enough today to take care of your daily expenses as well as goals, might not suffice to take care of same expenses and goals, a few years later. Inflation will eat away the value of your money

An inflation rate of five per cent or six per cent that you hear is the average overall inflation rate in our economy An inflation rate of five per cent or six per cent that you hear is the average overall inflation rate in our economy

You can't deny that every working person's dream is to accumulate one crore at the earliest. First thing first, a crore might not be enough. Why do we say so? Well, a number which looks big enough today to take care of your daily expenses as well as goals, might not suffice to take care of same expenses and goals, a few years later. Inflation will eat away the value of your money. This makes it crucial to work with real numbers. Never go for a round off figure to achieve your non-negotiable goals.

An easy math will explain the impact of inflation. Suppose an MBA degree costs Rs 15 lakh today. Assuming an inflation rate of 10 per cent, the same MBA degree will cost over Rs 1 crore after 20 years.

Inflation rate of 5% or 6%?

An inflation rate of five per cent or six per cent that you hear is the average overall inflation rate in our economy. Inflation rate for education, medical expenses would be different and in fact much higher than the overall inflation rate. You should do your own research to find out the rate at which the cost of your goal is growing. That is the inflation rate you should consider while doing your financial planning.

Moving on to where we started. How soon can you become a crorepati? Well, it depends on two parameters - how much are you ready to invest and the rate of return on your investment. Higher the returns and bigger your investments, sooner you will reach your target amount of one crore. See table below. For instance, if you invest Rs 10 lakh today in equities, assuming 12 per cent return on your investment, you will become a crorepati in 20 years.

Never underestimate small investments and the power of compounding

'Start early, start small' is the most heard advise. The reason financial planners and fund managers keep on repeating the same old advise, will become clear here. If you start to invest Rs 5,000 per month and continue investing the same amount every month through SIP in an equity scheme, assuming a 12 per cent CAGR return, you will become a crorepati in next 25 years. See the table below.

Similarly if you invest Rs 10,000 per month, at 12 per cent rate of return, you will accumulate one crore rupees in 20 years. The more you invest, the sooner you will be able to reach the target corpus.

Return on your investments

To provide you some idea about return on your investments, currently, bank FDs on an average offer around 5 per cent interest rate, post office time deposits offer around 5.5 per cent interest, public provident fund (PPF) account offers 7.1 per cent returns, Sukanya Samriddhi Account(SSA)? offers 7.6 per cent, the highest interest rate, among the small savings schemes. Five-year National Savings Certificate (NSC) gives 6.8 per cent, Kisan Vikas Patra offers 6.9 per cent.

Equity mutual funds in the last one year have given exorbitant returns due to lower base effect. The stock markets crashed around 40 per cent in a few sessions in March- April, 2020 as the nation-wide lockdown was announced amid rising covid cases. The benchmark indices has almost doubled from its lows of 27,000 levels an year ago. While some mutual funds are giving triple digit returns, most schemes are offering wonderful double-digit returns. These are abnormal returns. But those who remained invested through the tough times, must have reaped benefits now in terms of above average returns in their equity portfolios.

CAGR return of a five-year SIP in an equity scheme on an average stood at 14 per cent.

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