It was a Sunday morning a couple of weeks back when Mr Ajay Gautam called to know about some regular monthly saving and investment plans, and also about all other available option for long-term investment. And to start with, he is willing to put an amount regularly out of his saving every month and may continue the same until his retirement.
Mr Gautam is just 25 years old and has a long 35 years to his retirement.
Last year, Mr Gautam joined as scientists at a premier research institute at Shillong. He has started to love his job and the handsome salary that comes with it every month! During the initial few months, his monthly expenditure goes on to some basic necessities of life, like food, clothing and housing (shelter) and to fulfil some of his innate desires on what can be termed as few “objects-of-desires”. He purchased a big screen LCD TV, a three-door refrigerator, a 6GB smart-mobile handset, besides few branded clothing that suits his tastes. All these years, he has been a studious boy, and his requirements were all limited and basic. He also has to buy a ‘great-selfie” mobile handset for his college-going sister, and a DSLR camera for his brother.
With all these expenditures over, Mr Gautam has started to think how best he can put his monthly saved money to grow for his best use in future.
Saving is income not spent, or deferred consumption; Methods of saving include putting money aside in a deposit account, a pension account, or as cash. In Personal Finance, saving generally specifies low-risk preservation of money.
Investment generally refers to an endeavour with the expectation of obtaining an additional income or profit.
Legendary investor Warren Buffett defines investing as “… the process of laying out money now to receive more money in the future.” The goal of investing is to put your money to work in one or more types of investment vehicles in the hopes of growing your money over time
Thinking of how best he can grow his monthly/regular saving, he wants me to take him through some of the best available ‘investment’ options.
I patiently listened to this young man and asked him few questions about his likes and dislikes, his risk-taking ability, his present liability in any form – be it education loan, or a car loan or even a housing loan. I also enquired about his interests and knowledge of different Small Saving Schemes, and their rate of interest, and how the different interest rates could affect his returns over a period of time.
Mr Gautam said that for next 10-15 years, he would like to like to build a fund for himself and is open to the idea of simultaneously building his retirement fund.
Having all the inputs from my “young enthusiastic investor’, I started with an overview of Small Saving schemes like PPF, Post office Recurring Deposit Scheme and Recurring Deposit with Banks.
To give a better perspective, I made an attempt to explain with few comparatives:
Monthly deposit of Rs.1000/- in Post office Recurring Deposit for 5 years at 7.20% (interest calculated quarterly) would give you a maturity value of Rs.72,314 /-
Monthly deposit Rs.1000/- in PPF (Public Provident fund) for 15 years would grow at present rate of 7.90% (interest calculated annually) with approximate maturity value of Rs.3.50 Lakhs
Bank Recurring Deposit of Rs.1000 for 10 Years [at present rate of 6.25% (interest calculated annually) ] would have a maturity value of Rs. 1,66,671 /-
I further explained: And if you invest by doing a SIP in a Mutual Fund Scheme, you can earn even higher returns and maturity value”.
He asked – “What is SIP and how much more can I earn in, say in a time horizon of 15 years?”
I went on to explain him few details on how Mutual Funds work –
Systematic Investment Plan (SIP) is generally referred to monthly/regular investment into a Mutual Fund Scheme. SIP is a financial planning tool that helps you to create wealth, by investing small sums of money every month, over a period of time. A Systematic Investment Plan or SIP is a method of investment offered by Mutual Funds to help investors invest regularly in a disciplined manner.
SIP can be monthly, weekly, quarterly, or even daily
A monthly SIP of Rs. 1000/- with an Equity oriented growth schemes of a mutual fund, at CAGR of 12 % (CAGR = Compound Average Growth Rate) can give you Rs. 5,04,576 /- in 15 years time!
He added- “What if I keep increasing the monthly SIP by Rs. 500 /- every year till 15th year?”
I said, “Well, in that case, your wealth creation corpus, at CAGR of 12% would be Rs. 17,36,300 /- “
He puts another questioned- “ And if I keep investing only Rs. 1000/- till my retirement?”
“Your invested amount of Rs. 4.20 Lakhs would then become Rs. 64.95 Lakhs in 35 years“
“That’s Amazing! ’ he replied with astonishment. “When can I start ?”
With calm and ease, I answered – “Today !…. because every day is good day to start a long-term investment journey “
And The Financial Journey Begins …