How Does Investing Make You Rich?

If the best investments only get you 10-15% returns a year, how do people become rich from investing? 

In the investing world, getting rich usually requires being patient, disciplined, and understanding the incredible power of compounding. Even though it might sound surprising that yearly returns of 10-15% can make you wealthy, the real trick is letting your money grow over time. In this blog, we'll break down the idea of compound interest in an easy way and see how it can help you build financial success. 

Imagine your money as a snowball going downhill, getting larger as it rolls. Compound interest is like that growth. It's not just the extra money you earn on your initial amount, but also the extra money you've already made. This makes your money grow faster, turning regular returns into a strong way to build wealth. 

Example:  Let's imagine you decide to invest 1,00,000 INR (1 lakh) at an annual return rate of 12%, and the interest is compounded annually. Your initial investment grows not only from the principal amount but also from the interest earned each year. 

After 10 years, your 1,00,000 INR investment could grow to around 3,06,317 INR. This is achieved through the compounding formula: A=P(1+nr​)nt,  Where IS A, is the future value, P is the principal amount, r is the rate of annual interest, n is the number of times interest is compounded per year, t is the time in years. 

Now in the above example, our prime principal of Rs. 1,00,000 grew to become Rs. 3,06,317/- Similarly if we keep having Rs. 100,000 investment every year we will have several branches of Rs. 3,06,317/- thus making us “rich”.

So If one manages to save Rs. 10,00,000/- they become Rs. 30,63,170/- in 10 years’ time if invested at 12%

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Virtues needed to unleash the magic of growing money:

Patience and Consistency:

The real magic happens when you give your money time to compound. Consistently contributing to your investments and allowing them to grow over the long term is like planting a financial seed that blossoms into a money tree. The longer your money is invested, the more it benefits from the compounding snowball effect. 

See below the power of compounding when you are invested for 5 years versus when you are invested for 20 years. In 5 years Rs. 6,00,000 became Rs.8,25,000 but in 20 years Rs. 24,00,000 became almost Rs.1,00,00,000/-

Diversification and Stability:

Diversifying your investments across different assets can help manage risk. It's like not putting all your eggs in one basket. By spreading your investments, you protect yourself from the ups and downs of individual assets, enhancing the stability of your portfolio. 

Today’s youth unlike their forefathers have multiple options and guidance on investing. They don’t have to stick to conventional methods of investing like Bank Fixed Deposits.

They can choose to park their money in:

• Bonds,
• Corporate FDs,
• Equity shares,
• Mutual Funds (again having diverse choice of base assets),
• ULIP schemes,
• MLDs,
• Alternative Investments Funds

The risks and rewards are different in all of the above. But in today’s world, a customer has all the information at his disposal. He should never put all his money in one avenue but instead, create a diverse and balanced portfolio. Equity risk can be supported well with a bond exposure, mutual funds promise certainty but in bad economic windows, they also create losses. A balanced portfolio will help an investor sell through any level of risk and any type of economic cycle.

Becoming rich through investing isn't about hitting the jackpot with high-risk, high-return ventures. It's about understanding and harnessing the power of compounding. Even with modest annual returns, the compounding effect, coupled with consistency and time, can turn your financial dreams into reality. So, start early, stay disciplined, and let the magic of compound interest work its wonders on your wealth-building journey. 

Importance of SIP & SWP:

SIP: Systematic Investment Planning

In the SIP route, we get to invest as little as Rs. 500/- every month. The goal of SIP is to cultivate a regular investment and not wait to time the market. Currently market misunderstands SIP as investing in mutual funds, well it is partially true but the real meaning of SIP is to make any kind of investment regularly (monthly, quarterly, yearly etc). The choice of investment depends on the investor. Since investing should be started young, an early or mid-20s individual is usually in a service sector, and receives monthly income. He should aim to start setting aside some money every month to achieve his financial goals. As his skills and income grow along the way, so will his progress in the financial journey. He can keep increasing his investment with time and allow his investments to grow and multiply!

Lumpsum investments: Some investors prefer to invest in a lumpsum and then let it mature. These investors can choose options like bonds, equity shares etc. Once the money is parked, the investor waits for its maturity. These investments are not made like SIPs as it’s a one-time move and some investors choose to enhance the investment with additional funds in the future. They are not bound by the commitment of regular interval investing.

SWP: Systematic Withdrawal Plan

It is a plan, where once a lump sum is invested, investors can withdraw fixed amounts at regular intervals, for example – monthly/ quarterly/ yearly from the investment they have made in any mutual fund scheme. Here also, an investor can choose to divert from mutual funds and invest in other asset options and create a desired cash outflow. It is mainly for individuals seeking retirement but also can be sought by investors wanting to invest a lumpsum and seek an income stream.

Some Common Queries:

Q1. I have 83 lakhs of rupees. I will retire next month. Where should I invest so that I get a minimum of 3 lakhs as a fixed monthly income?

Ans: Rs. 3 Lakhs per month means Rs. 36 Lakhs in a year. This is a return of 43% p.a.
This is very difficult to achieve. Even though products like AIFs(alternate investment funds) a return of 24-36% is available with a very high level of risk. Since it’s the retirement fund we advise against this.
We advise an SWP at the rate of 15% return which will provide Rs. 100,000 withdrawal per month for 25 years.
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Q2. I'm about to retire. I have INR 1 crore in my bank account. Is it enough to live a good, retired life? I'm aged 59 now. 

Ans: Yes. A SWP plan should be implemented which will provide Rs. 100,000 income per month for 25 years if invested at a 12-15% rate of return.

Q3. My savings per month is 40,000 INR. I want to invest in such a way so that I can get 1 crore in 10-12 years. What is some guidance on the investment areas?

Ans: Yes it is possible in 12 years with a 12% rate of interest through a monthly investment (SIP)

Q4. I am 32 years old, and I want to start investing in mutual funds to achieve at least 2 cr by retirement. Is it possible? If yes, how much should I invest monthly?

Ans: Using the calculator, we can see that if Rs. 7500 is invested for 28 years at 12%, the investor will have Rs. 2 crores at his retirement age of 60yrs.

Q5. I have 1 crore rupees, where should I invest so that I get a minimum of 5 lacs as a fixed monthly income?

Ans: Rs 5 Lakhs per month is Rs. 60,00,000 per year. On an investment for Rs 1 crore in any security giving a 15% return also, these funds wont last more than 2 years in a row! The client can try Alternate Investments Funds for 24-36% return but this will also be subjected to a very high risk exposure.

Q6. I earn 70k inr per month. Saving around 50000. How much I should invest in SIP per month?

Ans: The investor should divide his Rs.50000/- savings per month into various options like SIP (MF), bonds, Insurance and other options. The longer he stays invested the higher will be his growth.

Q7. If I invest Rs 10,000 every month with 12% ROI, how much will I get after 10 years?

Ans: Using the calculator, he will have a sum of Rs. 27,88,069/- at the end of 10 years.

Q8. How much should I invest in a mutual fund per month to expect a sum of 1 Cr in the next 7 years? I am presently investing 55,000 per month for the last 4 months only.

Ans: In 7 years for Rs. 55000 monthly investment to become Rs. 1 crore, needs a ROI of 20%. Such high ROI is very highly unlikely, even if the risk tolerance of the investor is high.