New Delhi: It is almost the dream of every young boy or girl to accumulate a corpus of Rs 1 crore as soon as he/she starts earning. Although, the corpus Rs 1 crore looks big at first glance, it is actually not that difficult to save Rs 1 crore if one starts savings early in his life. For example, a 25-year old person can accumulate a corpus of Rs 1 crore by the time he/she reaches 55 years by investing just Rs 3,276.53 at the end of every month (assuming that investment grows at a compounding rate of 12 per cent for the entire 30 years). This means by investing just over Rs 100 per day one can accumulate Rs 1 crore in 30 years.
Gererating 12 per cent CAGR return for 30 years may sound unrealistic to some, but it is true that many equity funds have generated in excess of 12 per cent CAGR over the long term ( a search on Value Research website, a mutual fund research research portal, shows).
But this monthly investment requirement goes up significanty, if we start late. For example, the same person need to save Rs 10,974.41 at the end of every month to accumulate a wealth of Rs 1 crore if he starts savings 10 years later at the age of 35 years.
In the first example, a person contributes Rs 1,179,550 (Rs 3,276.53 per month for 30 years) or nearly 12 per cent of Rs 1 crore during the entire 30 years to accumulate total corpus of Rs 1 crore, while the remaining 88 per cent comes in the form of interest/return. But in the second example the same person need to contribute Rs 2,633,859.23 (Rs 10,974.41 per month for 20 years) or 26.34 per cent of Rs 1 crore if he starts 10 years later.
This difference is due to the power of compounting. Compounding is the process where interest/returns are reinvested to generate higher return. So the effect of compounding is higher if you start early.
Personal finance experts say one can start a Systematic Investment Plan (SIP) in a diversified equity fund to generate long term wealth. One can get profesional fund management along with higher returns by investing in diversified equity funds.