Saving A Crore May Not Secure Your Financial Future

If you plan and start investing early, you will benefit from the power of compounding and hence can accumulate a large corpus over time even by making smaller contributions

Most of us aspire to become a ‘crorepati’. While there is nothing wrong with that, it is important to analyse whether accumulating a corpus of ₹1 crore will be enough to meet all your financial needs during the different stages of your life. To begin with, you need to follow a process to build your investment portfolio to become a crorepati. The process should begin with ascertaining your time horizon, determining the right asset allocation as well as choosing investment options that can get you the best from the chosen asset classes.

In addition, you will need to work out how much to invest at an assumed rate of return to achieve your target. The next step would be to decide whether to invest as a lump sum or systematically at a pre-determined interval. Ideally, a combination of lump sum and systematic investment through SIP can be the best strategy. Of course, the deciding factor would be your time horizon and your ability to invest, both in terms of amount and the frequency of investing.

While becoming a crorepati can be a broader goal, it is important to look beyond it. For example, if you intend to build a corpus for retirement that may be 20 years away, you will need a much larger corpus than ₹1 crore. It is important to consider inflation while working out the target for such an important long-term goal. Assuming that your current expenses are ₹50,000 per month, and if you aim to maintain the same lifestyle after 20 years, considering inflation at 6 per cent, you will need ₹1.60 lakh per month at the start of your retirement phase. 

Don’t forget, your expenses will continue to increase even thereafter. Hence, you will need a minimum corpus of ₹5 crore at the time of retirement. In other words, ignoring the need to build a corpus large enough to lead a comfortable retired life can compel you to compromise during the most important phase of your life. If you consider other short-term and medium-term goals like children’s education, buying a house and travel, you will need to accumulate much more. Considering that you will need a certain amount for each of these goals at different intervals, the entire process can be even more challenging. No doubt, the thought of building such a large corpus can be overwhelming.

However, if you plan and start investing early, you will benefit from the power of compounding and hence can accumulate a large corpus over time even by making smaller contributions. In this process, asset allocation helps you achieve the right balance between risk and reward. Here, time horizon plays a key role. For example, for a short-term goal, you need to focus on debt and debt-oriented mutual funds as capital preservation is a priority along with earning modest returns. Similarly, for long-term goals, equity funds have to be the mainstay of the portfolio, as this asset class has the potential to not only outperform other asset classes but also provide positive real rate of returns i.e. returns minus inflation.

It is heartening to see an increasing number of investors in our country following a disciplined approach to investing. Over the last few years, the systematic investment plan (SIP) has emerged as a popular mechanism for investing in equity funds. However, while SIP is an efficient method of turning volatility to your advantage, you shouldn’t undermine the importance of investing lump sum money in equity funds periodically. The key, however, remains the commitment to stay invested for a pre-decided time horizon.