Small jumps often lead to big leaps!

small jumps often lead to giant leaps

The oldest man on earth, Yisrael Kristal, died recently at the age of 113 in Israel. But an important question is whether we can manage our finances if we live for 100 years or more? It would certainly be a challenge! Human lifespan has improved over the years due to advancements in medical science. However, there is not enough effort around creating adequate wealth and cash flows to allow us to enjoy this longer life span.

To solve this wealth challenge, it is very important for us to change the way we save. Firstly, financial savings in India are mostly invested in traditional, assured returns products. Secondly, savings in India are not bucketed according to goals but follow a single funnel approach where goals are met by drawing down from a single pool of investments as and when needed. Hence retirement, being the last goal, it is often left with the residual investment corpus as we draw down from the central pool for earlier goals.

It is therefore imperative for savers to move to a goal based investment portfolio as well as have a judicious mix of market linked products like mutual funds in their portfolio to benefit from their higher returns potential. One can start a mutual fund investment with as little as Rs.500 per month through a ‘recurring deposit’ like approach called a systematic investment plan or SIPs, what we call a #GoodEMI as it is an investment and not an instalment.

Let us illustrate this with an example. If we start an SIP of Rs.10,000 per month in an equity mutual fund, assuming a compounding return of 12% per annum, this monthly investment would result in a corpus of Rs.1 crore after 20 years and Rs.3.5 crore after 30 years, that too tax free as per current tax laws. While this is a standard SIP, an even more interesting SIP feature is called the Step-Up/ Top-Up SIP. Using this feature, one can increase the SIP amount by a certain percentage or amount every year in line with the increase in earnings. Let us assume an increase in the SIP amount of Rs.10,000 per month by 10% every year meaning the second year monthly SIP would be Rs.11,000 and the third year would be Rs.12,100 and so on. The revised corpus using step-up SIP at the same assumed return of 12% per annum would be Rs.1.58 crore after 20 years and Rs.6 crore after 30 years. Thus, the step-up SIP corpus after 30 years (Rs.6 crore) is almost double that of the SIP without step-up (Rs.3.5 crore). Thus a small jump of 10% every year helps us to build a far bigger corpus to achieve our goals.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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.

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