Every penny counts! To create wealth over the long term, you need to have a plan in place and invest regularly. Even a small amount invested regularly helps you create a sizable corpus over the long term. In addition to what amount you invest, equally important is how much returns you can generate on your investments. A small difference in terms of returns can result in a big difference in the corpus accumulated over the long term.
The returns generated from equity as an asset class are generally considered to be higher than returns generated by other asset classes such as debt, gold real estate etc over the long term. While calculating returns from equities, mostly an assumption of 12 per cent annualized return is considered to be a safer option. Some investors assume a return of 10 per cent to be on the safer side and to be more conservative in their calculations.
While calculating how much monthly you need to save for 15, 20 or 25 years, you may assume a growth rate of 10 per cent or 12 per cent. At 10 per cent, you will require less amount while at 12 per cent you will have to save more each month. Taking a lower assumption helps to be conservative and achieve more if other assumptions are met.
Assuming, Rs 5,000 per month is invested over 25-years, at 8%, corpus becomes approximately Rs 48 lakh while at 10%, it is about Rs 67 lakh and at 12% and at 15%, Rs 95 lakh and Rs 1.64 Crore can be accumulated respectively.
This shows a 2% extra return shoots corpus up by 40%, a 4% extra return shoots corpus up by 98%, a 5% extra return balloons corpus up by 145%!
Once you have calculated the monthly savings required, build a portfolio that can deliver a high risk-adjusted return with a properly diversified portfolio of schemes. If you have assumed 12 per cent and can generate even 2 per cent more, the resultant corpus will be huge. Also, if you have assumed 14 per cent and started to save accordingly, a 2 per cent lower return may hamper your financial goal.
Let us see how much a small difference in returns makes to your corpus over different periods.
A difference of 2 per cent when you save Rs 5000 every month:
Over 20 years: Rs 15 lakh
Over 25 years: Rs 45 lakh
Over 30 years: Rs 1 crore
This is assuming you can generate an annualized return of 14 per cent instead of 12 per cent over the period.
What you may do is to have your risk profile prepared and if your risk-taking capacity allows, especially when time is on your side to take some volatility in your stride, you may look at creating a higher return in your portfolio.