Mutual Funds9149 views
Binay and Bipin are twin brothers aged 25. Both have recently found employment. Binay has been employed by an MNC while Bipin has got a lucrative opportunity at a car dealership. They are opposites as far as their attitude to saving goes. While Bipin is frugal, Binay likes to lead a good life and often spends money as if there is no tomorrow. To give some financial direction to Binay, his brother invited their uncle Sanjay Sharma, a retired bank employee and now a financial advisor, to their home.
After a sumptuous meal on a Saturday afternoon, Sanju mama as he is fondly called, sat them down and asked them about their investment plans. Expectedly, Bipin said that he has set up an SIP (Systematic Investment Plan) in a mutual fund and saves Rs 10,000 every month while Binay said that he wanted to enjoy life when he was young and would start saving 10 years down the line.
Sanju mama poised to do some calculations and then showed it to his nephews. He said that if Bipin invested Rs.10,000 per month till the time he retires in 35 years, he would have a corpus of around Rs.6.5 crore by the time he is 60 years assuming a 12% p.a. return on investment. On the other hand, if he increased his investment by just 10% every year, Bipin’s corpus has a potential to grow to about Rs.18 crore over this period assuming the same rate of return. However, a delayed start would considerably impact Binay’s corpus which would be far lesser than that of his brother.
Getting perturbed by the scenario painted by his uncle, Binay came up with the argument that by 35 years, he would earn enough to save double or Rs 20,000 per month and thus would have no problem accumulating as much as his brother or even more. However, Mr Sharma pointed out his folly and said flashing the calculation that even if he saved Rs 20,000 per month, he would still not be able to beat his brother’s corpus at the same assumed rate of return. The calculations indicated that at an assumed return on investment of 12% p.a., Binay would only be able to reach Rs 3.80 crore, which is still a far cry from Bipin’s corpus. Even if he increased his investment by 10% every year, his corpus would still touch only Rs.4.3 crore by age 60 years.
The magic as Sanju mama pointed out to the boys was in the early start which gave Bipin the advantage of the “power of compounding” for more number of years. Despite doubling his monthly investment to compensate for the 10-year late start, Binay’s expected corpus @ age 60 years would be nowhere near Bipin’s. Mr Sharma hence pointed out that, “it is not only how much but also for how long you save that is important.” He reiterated the power of SIP which provides financial discipline as well as longevity, both key ingredients for wealth creation. The show of numbers had the desired impact on Binay who realised that the cost of delay was huge. He is now keen to start his SIP (which is like a Good EMI) immediately instead of spending all his money!
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All names and situations depicted in the blog are purely fictional and serve the purpose of illustration only. Any resemblance between the illustrations and any persons living or dead is purely coincidental.
Information contained in this article is not a complete representation of every material fact and is for informational purposes only. The recipient is advised to consult its advisor/ tax consultant prior to arriving at any investment decision.