Get the arithmetic of compounding and growth right for long-term goals
1 min read 16 Oct 2019, 02:34 PM ISTWhen it comes to investing, especially for long terms, the first thing to get right would be the arithmetic of growth and compounding
PremiumI am 28 years old and looking to create ₹10 lakh in 10 years. I currently invest in monthly systematic investment plans (SIPs)—Kotak Standard Multicap ( ₹500), ABSL Tax Relief 96 fund ( ₹500), SBI Bluechip fund ( ₹500), HDFC Hybrid Equity fund ( ₹500), IDFC Nifty fund ( ₹100), Reliance Credit Risk fund ( ₹100) Reliance Large Cap ( ₹100), and L&T Emerging business ( ₹500 per quarter). Am I on the right track?
—Sagar M.
When it comes to investing, especially for long terms, the first thing to get right would be the arithmetic of growth and compounding. We can make relatively reliable assumptions about the return potential of asset classes such as equity or debt for such purposes. Using these, we can do a calculation to see what our investments will amount to in a given period of time. In your case, you are looking to create a value of ₹10 lakh in 10 years using an SIP portfolio. So, the first thing we need to do is to figure out what the monthly amount of investment has to be.
There are several SIP return calculators online that will help you do that, but I can tell you that you need about ₹4,400 per month to accomplish your goal (assuming a long-term return of 12% per year from an equity-heavy portfolio). Presently you are investing ₹2,800, and regardless of how aggressively you invest, you will not be able to reach your goal.
Once you plan your finances to increase your monthly investment to ₹4,400 (or ₹5,000, to be on the safer side), then you can put together a good long-term portfolio. You do not need eight funds in your portfolio. A simple three-fund portfolio will do well as long as the funds are selected with care. From your current portfolio, for example, you can keep the Kotak fund, the HDFC fund and the L&T fund in a proportion of ₹2,000 each for the first two and ₹1,000 for the last fund. This portfolio will serve you well over your investment period and will likely get you to your goal. However, the first thing for you to do is to increase your monthly investment to a level that will let you reach your goal.
Srikanth Meenakshi is co-founder and former chief operating officer, FundsIndia.com. Queries and views at mintmoney@livemint.com
